Claiming back tax paid on interest

merlinthehappypig

We have our savings in my wife's name as she doesn't use her tax allowance.

She is currently registered for gross interest but, unless the house purchase goes through super quickly, she will go past the tax allowance for 2008/2009 in about two weeks, so needs to de-register and get the interest paid net.

Assuming the house purchase goes through in mid-May and the accounts are closed at that stage she will have earned about £6900 in interest and will have paid around £1400 in tax. She will actually only be liable for about £145 in tax after the personal allowance and the 10% band are applied.

Can she claim this back from the Inland Revenue immediately or does it have to wait until the end of the tax year?

Faling that, can she have the interest paid gross and send what she owes to the Inland Revenue immediately?

I'd rather the IR didn't hold on to her £1250 or so overpayment for a year, if possible.

rebeccaj

merlinthehappypig wrote: »

Faling that, can she have the interest paid gross and send what she owes to the Inland Revenue immediately?

No, it can't be done that way. She needs to tell the savings institutions and the Revenue that she is no longer entitled to gross interest so that interest will start to be paid net of tax in future. Then at the end of the tax year she will need to fill in an R40 form to reclaim the overpaid tax. It's a fairly straightforward procedure and they usually pay the overpaid tax back relatively quickly.

merlinthehappypig wrote: »

I'd rather the IR didn't hold on to her £1250 or so overpayment for a year, if possible.

unfortunately they prefer to hold on to it and it's their ball :rolleyes:

Claremac

Hi merlinthehappypig
It sounds like you and your wife are in a similar position to me and my husband. We have sold our house and are about to go into rented as we have struggled to sell (14 months) and now need to invest the capital to part-fund the rent. Would you mind if I PM'd you for some advice re investment of this capital and the interest/tax rules as I am floundering a bit?

merlinthehappypig

Claremac wrote: »

Hi merlinthehappypig
It sounds like you and your wife are in a similar position to me and my husband. We have sold our house and are about to go into rented as we have struggled to sell (14 months) and now need to invest the capital to part-fund the rent. Would you mind if I PM'd you for some advice re investment of this capital and the interest/tax rules as I am floundering a bit?

No problem, but I'm no expert. I can certainly tell you what I have learned from being in the same position.

Biggles

AFAICS, the problem with this is timing. The bank/BS will only apply the gross or net interest at the time interest is actually paid. What I am saying is, they don't look to see for what proportion of the period she was registered for gross interest and what proportion for net, they look at her status on the day they pay interest.

This means that, if her interest is paid annually and she is only 'deregistered' for gross interest for about 6 weeks, it is most unlikely that deregistering will result in any tax being deducted, ie the interest calculation will probably fall within her gross interest registered period. If interest is paid monthly, there may be only one interest payment falling during the period that she is registered for payment net of tax.

And, whichever way it is done and wherever the payment falls, the tax will need calculating by HMRC at the end of the year due to the fact that, for most of the year, her income will have been below her tax allowance.

Though it's probably strictly incorrect, if in your position I would be inclined to you allow the payment to be made gross and declare the interest at the end of the tax year (or the following tax year - bear in mind that, if paid annually, the main interest payment may fall in 2009/10). It will be a lot simpler that way.

merlinthehappypig

Biggles wrote: »

AFAICS, the problem with this is timing. The bank/BS will only apply the gross or net interest at the time interest is actually paid. What I am saying is, they don't look to see for what proportion of the period she was registered for gross interest and what proportion for net, they look at her status on the day they pay interest.

This means that, if her interest is paid annually and she is only 'deregistered' for gross interest for about 6 weeks, it is most unlikely that deregistering will result in any tax being deducted, ie the interest calculation will probably fall within her gross interest registered period. If interest is paid monthly, there may be only one interest payment falling during the period that she is registered for payment net of tax.

And, whichever way it is done and wherever the payment falls, the tax will need calculating by HMRC at the end of the year due to the fact that, for most of the year, her income will have been below her tax allowance.

Though it's probably strictly incorrect, if in your position I would be inclined to you allow the payment to be made gross and declare the interest at the end of the tax year (or the following tax year - bear in mind that, if paid annually, the main interest payment may fall in 2009/10). It will be a lot simpler that way.

Thanks for that.

The interest is all paid annually, apart from the ISA's which don't count. Due to the amounts of interest involved we have already divided the savings into a number of accounts. Some paid out just recently, in the 2007/08 tax year, and we managed to keep that just under the tax allowance.

We have two accounts paying out in August/September this year and it's these that are the problem. We are already up to about £4800 for the 2008/09 tax year and that's going up at £60 a day.

I'm going to open a new account this week, where the interest is paid annually on the anniversary of the account opening, so that will delay some interest to the 2009/10 tax year!

The problem is that much of the money is with Northern Rock, both for the interest rate and the security, so any transfer from there puts the money at risk over £35000 and loses the 6.9% fixed rate we have.

Problem is we aren't used to having money invested and are having to learn quickly. Pity we can't make us of her last 15 years or so unused allowances!

Biggles

At £60 a day till mid-May, the answer would seem to be to move as much of your funds as possible into new accounts that won't pay interest till 09/10. That way, she may avoid having to pay any tax at all. Even accepting a lower rate of interest would be worthwhile if it offset the tax (and avoided the paperwork).

Obviously, when you withdraw funds for your house purchase, you will need to keep enough in each account to keep it open, otherwise they will pay your interest on closing the account.