Early Closing of Saving Fixed Bond

newatc

I was reading the Sunday Times Money section and was amazed at an unfair tax rule so am putting it here so those closing a fixed bond early are aware of it.

Apparently if you close a bond early the loss of interest you are charged cannot be offset against the interest you would have earned if you kept to the full term. Thus a bond which would have paid 1000 before tax but has £700 early closure reduction would mean a higher rate tax payer effectively getting less money back than his original capital.

RobfromCornwall

I'm not sure I follow. Are you suggesting it's possible to be charged tax on interest you haven't been paid?

It's not usually possible to close a fixed term bond early, either.

masonic

The penalty you pay is not lost interest, it is a financial penalty or fee with a value expressed in terms of days of interest - usually specified in language like "early access charge equivalent to X days of interest". Many fixed term accounts do not permit access even with a penalty. There's nothing unfair about either of those practices. You pays your money and you takes your choice.

Likewise, if you have a current account that charges fees in various circumstances and pays interest on credit balances, you can't offset the fees against the interest.

There is usually a warning that early access can result in you getting back less than you put in due to the penalty that is applied, even before tax. In the worst case, if you opened with £1, topped up just before the cooling off period expired, then closed just afterwards, you'd still pay the £700 penalty, might only earn a few pounds in interest.

dcs34

I think this relates to a current media 'furore' regarding how some Bank/BS apply an early closure interest penalty charge and whether or not this is offset from the amount of interest they report to HMRC in the BBSI returns.

A dumb example but say you have an account that would pay £100 interest but can be closed early with say a charge of £75 interest.

Therefore you've made a 'net' position of £25 interest gained.

However the savings provider would report to HMRC that you'd earnt £100 interest and therefore HMRC might expect you to pay £0-£20-£40-£45 tax depending on your tax bracket.

For some this could mean paying more in tax than the actual amount of interest received.

My understanding is the banks/BS consider themselves required to declare the gross amount of interest (since the penalty is equivalent to an "account fee" which isn't netted from interest on other fee charging accounts). HMRC are either disputing or at least make it difficult to argue the penalty should be offset from the interest. Customers feel this is 'unfair' on them to pay tax on interest they "didn't receive".

However, given the same approach applies to the LISA as a disincentive from investing in these outside of specific circumstances I'm not entirely sure that this isn't something customers will need to accept as a cost of closing their fixed term accounts early.

newatc

I don't think many would choose fixed rate bond with the idea of closing early and indeed most saving providers don't give the option but I have seen it mentioned as a possible backstop. The example in the Times was a real life example who had asked for the paper to solve but of course the paper found HMRC were legally correct,

Doesn't seem right to me.

masonic

It mostly crops up with fixed term cash ISAs where individuals have the right to access at any time, and consequently rates are lower. In that situation tax is not relevant, but someone could still get back less than they paid in.

I don't believe a penalty is normally imposed when the term is ended early due to death, terminal illness, etc.

Perhaps these penalties should be banned and the accounts reverted to limited access, since the latter have taken off in recent years.

I've never seen the point of fixed term accounts that aren't really fixed term. You get a better rate (generally) because the provider has funding certainty, which is destroyed by permitting access. The penalty is supposed to compensate the provider for your breach, as they then have to attract additional capital at short notice.

35har1old

https://forums.moneysavingexpert.com/discussion/comment/81971269#Comment_81971269

Currently ISA rates are higher than ordinary fixed rate bonds

Take Santander ISA currently paying 4.5% with a cash back bonus of £50 which on £10000 =0.5 % and you don't have to wait a year

There fixed rate bonds currently 3.7% Nationwide ISA pays more than there fixed The same with HSBC

masonic

https://forums.moneysavingexpert.com/discussion/comment/81971368#Comment_81971368

ISA season is a weird time, and ISAs do tend to buck the trend a little vs conventional fixed bonds permitting access because of the annual allowance restriction. Currently easy access ISAs are paying up to 4.6%, albeit several of the top rates are made up with a bonus for newbies and/or with a rate applicable for new money only.

Easy access paying more than fixed has been a theme until the Iran hostilities. You don't always get a premium for fixing. When easy access pays more, then you wouldn't expect ISA fixes to pay less than conventional fixes - though sometimes they still do.

Hence "generally".