Fixed Rate Bonds - confused by HMRC advice

cc123mm456

I believe that the legislation does include the definition of interest arising for tax.

If the savings balance (or interest) can be accessed, even with the payment of a penalty, those accounts are defined with the interest arising for tax annually.

There are very few non-ISA fixed term accounts that allow any access before maturity, after the agreement has been entered in to.

The previous threads included some discussion about when a saver could have chosen interest to be paid away when opening the savings account (even if they did not choose that option), then maybe this could be construed as accessible for interest.

My opinion is that the agreement entered in to would be chosen at the start by the saver, and if they chose the version of the account with all interest retained in the account, and completely inaccessible until the end, that meets the definition of savings interest arising for tax at the end of term.

subjecttocontract

https://forums.moneysavingexpert.com/discussion/comment/81960937#Comment_81960937

You are of course entitled to hold any opinion that you wish but the HMRC position is the one that really matters where tax is involved. Any account (fixed or not), that can be accessed, (with or without a penalty charge) is considered accessible and therefore tax becomes due on any interest in the tax year it's paid.

masonic

https://forums.moneysavingexpert.com/discussion/comment/81960937#Comment_81960937

If it came down to transactions (i.e. interest wasn't deemed taxable until it was accessed rather than accessible), then those people who have held money in an easy access savings account compounding interest for years would get a nasty shock when HMRC came calling for tax on multiple years worth of interest when they finally decided to move the money from one account to another.

CatLover17

Thanks eskbanker that's good to know. BTW - it was definitely not my intention to apportion any blame at the Savings Providers, I had assumed that they were providing the data as requested. As this issue has come as a surprise to me, I just want to get my tax return right and I suspect my return will look quite different to what HMRC has on record for me.

masonic

https://forums.moneysavingexpert.com/discussion/comment/81961387#Comment_81961387

"I suspect my return will look quite different to what HMRC has on record for me"

Which is how it was for me for several years, but I've not had any follow up from HMRC regarding the differences.

cc123mm456

Just to be sure that the point is understood

If your fixed term savings account is a joint account with 2 account holders, then when you report the interest (in the appropriate tax year), each of the account holders will report 50% of the interest.

masonic

https://forums.moneysavingexpert.com/discussion/comment/81961404#Comment_81961404

The starting position is that it is shared 50:50 between the account holders. The account holders are at liberty to make a case for different treatment, although I don't know what HMRC would accept in terms of justification.

intalex

https://forums.moneysavingexpert.com/discussion/comment/81961337#Comment_81961337

Ultimately, any change would need to leave the taxation pretty much automated (auto-validated) or very very low maintenance; I just can't see how having to justify one's self assessment with specific account T&Cs is ever going to be practical for the masses. Whilst I've read with interest how some folks have deviated from bank reported (annual) figures and not been questioned, I've yet to read about anyone providing explanation and evidence (reference to T&Cs) to justify the deviation and had it accepted by HMRC.

It would be nice if HMRC came out recognising this grey area and at least acknowledged that the rule supercedes the bank reporting, which would guide taxpayers on how to proceed. MSE can be highly influential in making this happen, whereas a common taxpayer like one of us wouldn't even get a straight answer.

In terms of a permanent and aligned solution, one option would be to keep everything exactly the same except for mandating fixed rate products to either pay all interest at maturity or pay away monthly (or annually, although I don't see much point of this) like the two NS&I variations. That would be compliant with the current rule and reporting mechanism. But it would also be the end of compounding for those who intend to not access their interest but also wish for taxable interest to be spread annually across the fixed term.

Edit: On the point about accessed vs accessible, I'd say both are irrelevant in what I was alluding to earlier, and the crediting transaction (in our out) should be the determining factor for taxation. Hence why the proposed solution above.

masonic

https://forums.moneysavingexpert.com/discussion/comment/81961698#Comment_81961698

If you do self assessment, then no justification is necessary. You just enter the correct figure for total interest in the box and pay the right amount of tax.

Things only become difficult for those who don't self assess.

Agree with you about the potential solution, except for your point about compounding. There is zero benefit to seeing a fictitious credit after 1 year when it cannot be accessed for another year. If you have a 2 year fix at 5% AER with no access until maturity, you end up with £1,102.50 after 2 years, whether interest compounded daily, monthly, annually, or at maturity. Seeing a balance of £1,050 after 1 year is nothing but theatre.

intalex

https://forums.moneysavingexpert.com/discussion/comment/81961239#Comment_81961239

Not sure what position HMRC holds - the written rule implies taxation at maturity for compounding annual interest, the practice is to expect taxation based on bank reporting. Individuals are choosing to do what they think best, but there isn't one clear process being followed by everyone.