Fixed Rate Bonds - confused by HMRC advice

Albermarle

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

As mentioned previously it is not actually a problem for most people. In fact it is often an advantage that interest is spread out over more years.

masonic

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

Normally, yes, but I did very well out of taking out a Newcastle BS 5% 5 year fix in circa 2009 when the base rate was 0.5%.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81962450#Comment_81962450

And I remember taking a 3 ?year fixed term at 7% with Northern Rock in 2009. After they were rescued the savings part stayed active in the market but needed cash, and many potential customers were scared off due to the name. So they offered very attractive rates.

masonic

https://forums.moneysavingexpert.com/discussion/comment/81962710#Comment_81962710

Ah, those were the days. With the FSCS backing me, I was only too happy to help these institutions deal with their cash-flow crises. It was rather less scary than the Icelandic banking situation, which put me off ever putting money into a firm without direct FSCS protection again.

fiddlesticks0

I thought I'd share my findings having been going through this recently.

I was caught out with a multi-year bond paying interest annually into the bond which I had believed was taxable all in the year of maturity only. They however report it annually to HMRC so I'll in fact be taxed annually.

As a result of this I've contacted the providers of some other similar multi-year bonds I have. Some providers haven't got back to me yet, some told me that annual 'applied' or paid tax into the bond is reported to HMRC annually and will be taxed annually. The reply from one was very frustrating - it said it reported the annual interest to HMRC annually, but they considered the interest only available at maturity, so should be taxed only at maturity and provided me a draft letter to supply to HMRC with this argument.

As I have multiple multi-year bonds, I certainly don't want to have to argue with HMRC, for each of them, each year, that they should be reversing their position, so his has left me believing that it's impossible to plan ahead as there is seemingly no consistency to how such interest ix taxed, and that only at the end of each tax year I'll know how HMRC have viewed a particular provider's bond in terms of taxation.

I was left really annoyed as I thought I had misunderstood this situation, which has blown all my tax planning out of the window - and this does not only affect the previous tax year, it's caused issues for 2024-2025 as HMRC have only just got around to informing me there is a situation with that year as well. I've just noticed however that this info is still on MSE, and this is (amongst other sources) where I have got this seemingly incorrect (at least some of the time) information from:

You're taxed on savings interest in the tax year you can access it

This means if you opt for a fixed-rate savings account longer than a year, and choose for interest to be paid at maturity, then all that interest is counted towards the final year's PSA as that's when you can access it. The same is true if monthly or annual interest is paid by the bank into the fixed account, so you're unable to withdraw it until the date the fix matures.

https://www.moneysavingexpert.com/savings/personal-savings-allowance/

This situation is so frustrating as a large amount of time planning ahead for many tax years has been effctively wasted as I was working from (semingly) incorrect information. It will now also take weeks to try and sort out, and the issue is now baked-in for the next few years as well, causing issues not just for now but for future tax years. How there can be such 'grey area' 'rules' for something so important, I have no idea.

Edit: re the suggestion on here re some providers bond funds being technically 'accessible' (via a fee or otherwise), and whether or not this is the case, is what determines the tax situation. Is this confirmed or just hearsay please? Does anyone have actual proof/experience of bonds that trully lock-in the funds for the entire term, only having the interest taxed in the year of maturity, as from what I've read the most common result in this situation is that HMRC will tax annually?

Enzo_L

"The reply from one was very frustrating - it said it reported the annual interest to HMRC annually, but they considered the interest only available at maturity, so should be taxed only at maturity and provided me a draft letter to supply to HMRC with this argument."

That's actually the most helpful reply. The law says that savings institutions have to report the interest every year when they add it to your bond; but the law also says that HMRC are only meant to tax that interest at the end of the life of the bond if that's when it is available to the bond holder.

The "very frustrating" reply you got is the only one that has provided you with the correct explanation of the situation and given you practical help to deal with it.

fiddlesticks0

https://forums.moneysavingexpert.com/discussion/comment/81965380#Comment_81965380

That may be your interpetation, but I emailed them multiple times asking whether their product would be applicable for tax annually or at maturity only, and they couldn't tell me.

Also, I don't want to be arguing with HMRC after the fact, for multiple bonds, for each year of interest. I do appreciate that it doesn't appear to be (mostly) the providers fault however.

Having read through a few threads on this subject I'm still none the wiser as the law you mention doesn't seem to be worth much when it seems, from plenty of people's experience, that these laws are simply not applied consistently by HMRC - they seem to most often tax annually regardless of this supposed law, as I have just been for such a bond.

So I'm still left with the situation that I won't be able to know what my situation is until a tax year has ended, for a product which should have consistent, known tax rules that can be planned for.

I still don't understand how MSE (as I quoted) can seemingly have incorrect information on this matter shown - if it is a grey area, at least flag that it is so, and that HMRC seemingly do not concur with the rules as they are described on this website.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81965446#Comment_81965446

I have a vague memory that with a similar thread some time ago, one of the MSE people on the forum did go 'upstairs' with the query . The answer was that the advice on the MSE website was in line with HMRC rules, so they would not change it.

However I would agree that it would make sense to flag up this grey area.

newatc

I've come to the conclusion that HMRC will base the tax on the interest that is reported to them, sensibly enough.

The issue is how saving providers implement their HMRC reporting. I found that the saving providers are not consistent with their reporting so when it not clear, I ask the provider how they are reporting the tax and make my figures (and returns) consistent with the provider reporting.

fiddlesticks0

https://forums.moneysavingexpert.com/discussion/comment/81965475#Comment_81965475

It's maddening. Just from reading the info in this forum, most people are being caught out by thinking/being told that interest is only going to be taxable at maturity, when in fact HMRC are taxing it annually (as providers give them this info annually). If most are in fact paying annually then I can't see how MSE are saying something different.

The long and short of the back and forth with the one provider is basically telling me that their product should only be taxed at maturity, but that it will probably be taxed annually (as they will report annually to HMRC), and here's a letter which may or may not help you to argue the former, but will give you absolutely no ability to know in advance which of these two scenarios will actually happen