Fixed Bond Interest Tax Bill Despite Interest Not Being "Accessible"

karl10247

Hi all,

In a previous thread i wrote about the difficulty in selecting multi-year (e.g. 3-5 years) fixed rate bonds that retain your interest each year and credit it to the account i.e. compound your interest.

Back in 2023 I took a long time to select 5 bonds that pay at maturity only as this would be more efficient for me tax-wise. However another forumite brought to my attention that even if a bank does pay out interest at maturity the real difficulty lies in understanding when banks report interest to the HMRC - apparently a very well known annoyance in this forum.

So fast forward to yesterday and i receive a letter from the HMRC saying i have not paid enough tax in 2023-2024. On investigation they say i received around £10k untaxed interest - ergo a tax bill of around £2000. But the vast majority of this interest was never actually paid to me, its interest that has been earned and credited in my fixed bonds which is not accessible to me!!!! Grrrrrrrrrrrrrrrrr!!!

My question is:

Can this tax be challenged with the HMRC explaining that the interest is tied up in a fixed bond and is inaccessible? Would i even want to, now knowing ill only have to go through this nonsense year on year until these annoying bonds mature?

Or

Should i just pay the tax bill, negating the tax efficiency that i strived to achieve by taking 3-5 year fixed bonds that pay only at maturity?


Fixed bonds are really losing their appeal!!!!

Thoughts?

wmb194

karl10247 said:

Hi all,

In a previous thread i wrote about the difficulty in selecting multi-year (e.g. 3-5 years) fixed rate bonds that retain your interest each year and credit it to the account i.e. compound your interest.

Back in 2023 I took a long time to select 5 bonds that pay at maturity only as this would be more efficient for me tax-wise. However another forumite brought to my attention that even if a bank does pay out interest at maturity the real difficulty lies in understanding when banks report interest to the HMRC - apparently a very well known annoyance in this forum.

So fast forward to yesterday and i receive a letter from the HMRC saying i have not paid enough tax in 2023-2024. On investigation they say i received around £10k untaxed interest - ergo a tax bill of around £2000. But the vast majority of this interest was never actually paid to me, its interest that has been earned and credited in my fixed bonds which is not accessible to me!!!! Grrrrrrrrrrrrrrrrr!!!

My question is:

Can this tax be challenged with the HMRC explaining that the interest is tied up in a fixed bond and is inaccessible? Would i even want to, now knowing ill only have to go through this nonsense year on year until these annoying bonds mature?

Or

Should i just pay the tax bill, negating the tax efficiency that i strived to achieve by taking 3-5 year fixed bonds that pay only at maturity?


Fixed bonds are really losing their appeal!!!!

Thoughts?

Yes, tell HMRC that it was inaccessible and the liability doesn’t arise until the end of the term. Unless you complete a self assessment return you’ll probably have to go through this every year.

IIRC someone in another thread who did this said that HMRC asked them to provide the account’s terms and conditions so it could confirm.

wmb194

JamesRobinson48 said:

In order to figure out whether this might realistically be challenged with HMRC, it would be helpful if you are prepared to disclose which bank(s) your 5 bonds are with.  From an earlier thread I gather you were looking at Gatehouse. But on that thread another forumite spotted that, at bond opening, Gatehouse allows customers to opt for interest to be paid away. As was pointed out, that would make the interest "accessible" annually even if the customer didn't opt for it.

There are other threads where apparently HMRC says having that choice doesn’t matter.

karl10247

wmb194 said:

Yes, tell HMRC that it was inaccessible and the liability doesn’t arise until the end of the term. Unless you complete a self assessment return you’ll probably have to go through this every year.

IIRC someone in another thread who did this said that HMRC asked them to provide the account’s terms and conditions so it could confirm.

I spoke to HMRC and they were actually really helpful. You were correct, I told them about the money being inaccessible until maturity and they said they can fix it if I send some interest statements to them via a postal address. 

I can do this of course, it shouldn't be a problem. MOST (but not all annoyingly) give interest statements through their online account tools. However, as you say this will probably crop up every year .

Its disappointing. I took so much time studying T&Cs when selecting these bonds to make sure they only paid at maturity yet they still reported interest earned per year to HMRC as if it were paid away it into my current account. What an absolute nightmare this whole setup is. I'm not happy with these banks and wont be considering multi-year fixed bonds ever again.

Anyway thankyou for your response

VNX

I’m expecting exactly this, vast majority of my money is in ISAs the money that isn’t I’ve put into 1/2/3/4/5 year bonds working out the amount per account based on the interest rate to receive just under 1k pa each year but as above I’m sure sone banks will report the interest annually 

Albermarle

Its disappointing. I took so much time studying T&Cs when selecting these bonds to make sure they only paid at maturity yet they still reported interest earned per year to HMRC as if it were paid away it into my current account. What an absolute nightmare this whole setup is. I'm not happy with these banks and wont be considering multi-year fixed bonds ever again.

On the other hand some of us quite like this situation, as we prefer to have the interest counted for tax each year, rather than one big slug at the end. 

refluxer

VNX said:

I’m expecting exactly this, vast majority of my money is in ISAs the money that isn’t I’ve put into 1/2/3/4/5 year bonds working out the amount per account based on the interest rate to receive just under 1k pa each year but as above I’m sure sone banks will report the interest annually 

In my experience, if interest on a fixed rate bond is credited to the account monthly or annually (and your balance increases accordingly), then bank or building societies will report this after the end of every tax year to HMRC.

The only exception I've come across is banks like OakNorth, who pay interest on maturity. While OakNorth do give an indication of how much interest you're earning (which is updated daily I think), your balance remains the same and the interest is only actually credited when the account matures. I had a 2 year bond with them a few years back and can confirm that the total amount of interest earned was only present on the interest summary for the year it matured.

km1500

Yes, it will be credited (indeed you want it to be so that it is compounded) but it shouldn't be taxable until.the end of term even if it is reported each year

zagfles

km1500 said:

Yes, it will be credited (indeed you want it to be so that it is compounded) but it shouldn't be taxable until.the end of term even if it is reported each year

You don't necessarily "want it to be" any more than you want interest paid monthly so it compounds. You just need to use the AER to compare rather than the gross rate. The AER for a multi-year account that credits at maturity should be lower than the gross rate, so as long as you use the AER as the yardstick you don't need to worry about the benefits of compounding.

Much better to have an account that doesn't cause the utter confusion of paying inaccessible interest, where what they report doesn't correctly reflect the interest you're legally liable for tax on that year. 

refluxer

km1500 said:

Yes, it will be credited (indeed you want it to be so that it is compounded) but it shouldn't be taxable until.the end of term even if it is reported each year

Unusually, despite not being credited annually, the total amount of interest paid upon maturity of a 2+ year fixed term Oaknorth account is the same as if it was credited annually (I checked because I didn't want to lose the effect of compounding).

It's just a shame their rates aren't competitive at the moment (they have been in the past), as this approach would ensure that interest is only taxed when it is accessible upon maturity, as the official rules state.

masonic

karl10247 said:
Its disappointing. I took so much time studying T&Cs when selecting these bonds to make sure they only paid at maturity yet they still reported interest earned per year to HMRC as if it were paid away it into my current account. What an absolute nightmare this whole setup is. I'm not happy with these banks and wont be considering multi-year fixed bonds ever again.

I completely agree with the sentiment. Very easy for them to credit all of the interest at maturity to align with it arising for tax, with the same total interest due over the term. Some providers do credit at maturity, and sites like moneyfactscompare allow you to see this easily.

The system is much easier if you self-assess.