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

butterflymum

https://community.hmrc.gov.uk/customerforums/pt/22764193-a0dc-ee11-a81c-6045bd0cee3e

masonic

TheGreenFrog said:

Albermarle said:

Article in the media, not entirely accurate.
HMRC sent tax demand for my fixed savings account - even though I won't be paid the interest until it matures | This is Money

Interesting, especially as one of the experts seems to be of the view that the banks can choose whether rolled up interest is taxable when capitalised or when paid out.  

As we all know, banks cannot choose, nor differentiate between accessible and non-accessible interest.

https://www.gov.uk/guidance/how-to-complete-a-bank-and-building-society-interest-return

However, they can choose whether or not to credit the interest. Perhaps the FCA or HMRC should intervene and ban the practice of crediting inaccessible interest, as this is merely an accounting trick. If the interest is not accesible, then under current legislation and HMRC interpretation, there is no practical difference between crediting X1, X2, X3... annually vs (X1 + X2 + X3 ...) at maturity.

TheGreenFrog

masonic said:

However, they can choose whether or not to credit the interest. Perhaps the FCA or HMRC should intervene and ban the practice of crediting inaccessible interest, as this is merely an accounting trick. If the interest is not accesible, then under current legislation and HMRC interpretation, there is no practical difference between crediting X1, X2, X3... annually vs (X1 + X2 + X3 ...) at maturity.

I agree - although perhaps the banks think that by crediting the account it is clearer to the depositor that there is compounding of the interest at the interval on which the interest is credited.  This could easily be dealt with in the terms of the bond though.

masonic

TheGreenFrog said:

masonic said:

However, they can choose whether or not to credit the interest. Perhaps the FCA or HMRC should intervene and ban the practice of crediting inaccessible interest, as this is merely an accounting trick. If the interest is not accesible, then under current legislation and HMRC interpretation, there is no practical difference between crediting X1, X2, X3... annually vs (X1 + X2 + X3 ...) at maturity.

I agree - although perhaps the banks think that by crediting the account it is clearer to the depositor that there is compounding of the interest at the interval on which the interest is credited.  This could easily be dealt with in the terms of the bond though.

Yes. In modern times, there is no reason why they can't show the current accrued interest without crediting it, even on a daily basis. Some providers already do something like this.

Swipe

Maybe the banks should give people the choice of it being credited annually or at maturity.

refluxer

masonic said:

Yes. In modern times, there is no reason why they can't show the current accrued interest without crediting it, even on a daily basis. Some providers already do something like this.

Yep - OakNorth do this with their fixed rate accounts, where interest is paid on maturity. You get to see the balance as the initial deposit (which remains static for the duration of the fixed rate period), plus a couple of extra fields for the daily interest earned (but not actually credited) and even a figure for the total amount of interest that will be paid at maturity, both of which are presumably just for your info.

It's a good approach and makes it easy to stick to the rules. I'm not sure I've come across any other savings providers that do this, so it would be interesting to hear about others that do.

Despite the interest only being paid on maturity, the payment is calculated as if the interest had been credited annually and compounded accordingly, which struck me as unusual, especially as there are some banks who do credit the account annually but don't compound the interest ! (Close Brothers and Tandem are two of those, IIRC)

It's just a shame OakNorth's rates aren't always the best (the few I've held were at the time I took them out but they're just not very consistent).

TheGreenFrog

refluxer said:

Despite the interest only being paid on maturity, the payment is calculated as if the interest had been credited annually and compounded accordingly, which struck me as unusual, especially as there are some banks who do credit the account annually but don't compound the interest ! (Close Brothers and Tandem are two of those, IIRC)

The AER quoted for a bond is calculated on the basis that the interest is compounded annually.  As the AER is the headline rate then it doesn't matter too much if instead a higher (but not compounded or compounder less frequently than annually) or lower (but compounding more frequently than annually) rate is used to achieve the same AER.  But it certainly adds to the confusion.