Fixed Rate Bonds - confused by HMRC advice

x44

A while on here there was someone on about some NSI product that indeed paid all its interest at the end of the multi year term.

Naturally this resulted in the OP of that thread suddenly finding they had so much interest paid out all at one go in one tax year that they were now in the higher tax bracket as a result of it. Just another reason why waiting until the end before getting or declaring the interest may not be the best way forward in some cases.

masonic

https://forums.moneysavingexpert.com/discussion/comment/81961724#Comment_81961724

in most cases it is preferable to spread interest over multiple tax years. Which is why this should be taken into consideration when selecting your product. It is not something a taxpayer should be misreporting in hindsight to gain more favourable treatment.

intalex

https://forums.moneysavingexpert.com/discussion/comment/81961714#Comment_81961714

I honestly cannot see HMRC doing away with validation against bank reporting be it self-assessment or not, I can accept that they may pick and choose which deviations to pursue, but if it recurrs for the same taxpayer (e.g. on a 5-year fix where the taxpayer declares 0 in the interim years despite bank annual reporting being material amounts) then this may turn into a red flag. This is why some acknowledgment from HMRC over this matter would go a long way into guiding people and avoiding this red flag.

I also can't see HMRC tracking these things on a cumulative basis, and even then a 5-year fix could accumulate a big gap in the first 4 years for a sizeable fix and to even wait until year 5 before taking action would be a big ask.

This would be a very interesting project for a small team of bright sparks at HMRC to immerse into and come out with a clean solution covering all bases.

EDIT: on the point about annual interest compounding, I think the spirit of income from interest, which is a time-based calculation, cannot be considered inapporpirate or unfair to apportion over multiple tax years just because one wishes to achieve the perfectly legit (and difference-making) art of compounding. The only problem is that the tax for the interest may need to be funded from other cash whilst the interest compounds and stays inaccessible, but for willing taxpayers, that should not be a problem.

masonic

https://forums.moneysavingexpert.com/discussion/comment/81961743#Comment_81961743

HMRC cannot "do away" with something they are not doing. They can continue not doing it and I expect they will do just that in the case of self assessment. There is not one single reported case of what you suggest, yet many of us fall into the category you are suggesting "may turn into a red flag". HMRC will know after many decades of experience that not all interest arises for tax in the year it is credited. They've even been to court multiple times to defend that status quo and create the case law they now rely on. They are not at liberty to change the legal position. That is a matter for Parliament alone.

Nevertheless, it is good practice to retain evidence of when interest has arisen for tax. If an investigation is opened for any reason, you should be prepared for all of your tax affairs to be scrutinised.

intalex

https://forums.moneysavingexpert.com/discussion/comment/81961772#Comment_81961772

If the bank reporting is catching out those not completing selff-assessment, then surely it will also be of some significance as a benchmark for self-assessment? Couldn't agree more about retaining all evidence where you know your self-assessment deviates from bank reporting.

masonic

https://forums.moneysavingexpert.com/discussion/comment/81961819#Comment_81961819

All the evidence points to HMRC accepting the figures submitted by those in self assessment, which is not the case for those not completing a tax return, who have a great deal of difficulty getting HMRC to accept any other figure.

Ocelot

https://forums.moneysavingexpert.com/discussion/comment/81960694#Comment_81960694

I have posted many times about HMRC ignoring any communication or calls I sent to them about paying tax before I had access to the interest. In the end I gave up.

subjecttocontract

Apart from one Nationwide 18 month account, I don't think that I have ever taken a cash savings product for longer than 1 year.....and I guess that's how I have always avoided this sort of problem.

Georgemc

https://forums.moneysavingexpert.com/discussion/comment/81962296#Comment_81962296

That's the ONLY strategy to consistently have good interest. The banks rely on people just leaving it in one place even after the introductory rate drops and drops. You have to shop around.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81962299#Comment_81962299

Two points:

Firstly only some providers have introductory bonus rates, however it still pays to keep an eye on rates.

Secondly you can always go for fixed term/fixed rate accounts.