Tax Review Form, Gross Interest and Halifax Guaranteed Reserve Bonds

gundo

Sincere apologies to Board Admins if this query is in the wrong forum please move as necessary.

I've a query regarding my Mum's finances (she is 70, retired since 1992 and never earned very much having been a tea-lady, factory worker, canteen assistant etc. but saved hard). She recently got a form from HMRC requesting details of all Gross (untaxed) Interest she received in the tax year 07-08. Well it so happens that she had 3 Halifax Guaranteed Bonds mature in Feb 08 after 8 years. The interest was paid gross and as I understand it represents 8 years of compounded interest (the Bond works by being fixed interest and no withdrawls or further deposits are allowed during the 8 years and no interest is paid until it matures).

Well to cut a long story short on the face of it would appear that her Gross Interest income was excessive in 07-08 but I'm confused, if she'd received the interest anually and left it to compound then her Gross Interest in 07-08 would be a lot less. How will HMRC view this, is she going to get penalised? Also how to ensure that next year HMRC don't assume that her savings interest income is going to same as this year which was an exceptional blip? Is she then going to have to be reassessed next year?

Surely Bonds like this must be a really bad idea if you've reasonable savings as when they mature they'll artificially bump up your income in one tax year with possible tax consequences whereas a normal account that pays interest annually and compounds it won't do this?

A bit of background. I'm saddened that I don't know more about this stuff (tax, finances etc). My Mum's first language isn't English and she struggles with all financial/official letters etc. So I do it all for her. My Dad (who was English) died two years ago (almost to the day) aged 80 and sadly in his last few years had Alzheimers. Prior to this he dealt with all her and his finances (a traditional husband you might say) and he must have set up these savings for my Mum's money with the hope that she would get a good return and her future finances would be secure.

Mikeyorks

Sensible check first of all, to look very carefully at the T&Cs of the Bonds and ensure the interest is chargeable to Income Tax (as opposed to Capital Gains Tax)? I suspect it's the former ... but you do need to check as it could make a biggish difference to the outcome (CGT has a separate allowance just over £9k - whereas her IT allowance will probably be already mainly used with pension etc?). If not clear - Halifax should be able to tell you (or it's on the documents that came with the cheque?).

Unfortunately any tax on the interest is due when it was paid ..... not when it accrued. And you're quite right ... it can make a significant difference and you need to be aware of the implications when you take out a product such as this. My mother recently had a 5 year NS&I Guaranteed Equity Bond mature with a 60% gross profit. Same situation applies, she will have an exceptional liability for 07-08 as a direct result. Despite the fact the 60% represents the result over 5 years .... the tax liability is created at the point it matures and the 'interest' is paid.

It's probably a P810 you have to complete? Not entirely sure it's been created by the maturity in Feb 08. As that suggests Halifax were exceptionally quick off the mark in notifying HMRC of the gross interest paid .... and HMRC have been equally swift in reacting. P810s are issued in bulk in April and particularly to people who used to be in SA, but no longer are. However - that's a bit academic as you still need to fill it in. You can add a note to the effect the Bonds are a 'one off'? But don't expect an immediate reply as HMRC tend to stockpile these until September before doing any work on them.

But if you post your Mum's details .... someone will be happy to work out what her extra liability is likely to be for 07-08. You will need to post her P60 details for 07-08 (pension income etc / Code number / tax deducted). Also any gross interest from other savings .... and whether tax has been deducted (20%) at source. Also State Pension ... if the P60 comes from an occupational pension. Ideally put all of that on the Cutting Tax forum (5 forums below this one) .... but link to this thread so you don't have to repeat it all?

If your Mum only has a State Pension ... then the odds are that the P810 has been issued because of that. And it's just a co-incidence that the Bonds have recently matured.

dunstonh

The banks and insurance companies are notorious for over using the word "bond". You have investment bonds under life assurance taxation, guranteed equity bonds which also fall under life assurance taxation but also unit trust taxation and ISA. You have fixed term deposits which are often called fixed interest bonds incorrectly and they can fall under income tax rules as well as ISA.

So, make sure bond means bond (it almost certainly doesnt if Halifax are involved) and make sure the right tax is used.

As for the form, I wouldnt worry about why its been sent. I have been inundated with clients phoning me telling me they have this new form arrived in the post and can I fill it in for them. It seems HMRC have been busy sending them out with no apparent targeting.

Meltdown_2

My guess is that gundo's mum is going to take a hit on this (but there are people here who would know).
Her circumstances, coupled with recent stories about non-doms, etc shows just how very wrong our tax system is. :mad:

Any chance that Halifax can be hauled-up for mis-selling these "bonds".
After all, having 3 eight-year products all delivering their total interest in a single tax-year was always going to be a bad idea, as gundo says.

Mikeyorks

Can't see how it's a mis-selling issue? After all if you open any fixed rate product (especially a GEB that traditionally runs 5 years) that spans more than one year ... you get a similar effect. Although choosing (operative word?) to open 3 with conspirational maturity dates is a bit unusual.

dunstonh

Many years ago (1995 IIRC) I did a a number where I recommended splitting the money with 3 different GEBS. as each had a variation. I could have done one or three but the same amount was invested. BTW, 1995 was the last decent GEB i can recall before the Premier one we discussed recently. Those ones in 1995 were on the life assurance wrapper as well so no tax to pay for basic rate or lower taxpayers.

I wonder if the proximity to age allowance reduction could be the issue the HMRC are trying to catch here?

regularsaver1

I am wondering why there is the use of the phrase "Guaranteed Reserve" in the thread heading - as this is a deposit fixed rate savings account with a maximum term of 3 years, although they can be rolled over. They are not investments.

Unless this term was used in error?

Mikeyorks

dunstonh wrote: »

I wonder if the proximity to age allowance reduction could be the issue the HMRC are trying to catch here?

I don't think so - because the P810 (as you mention earlier) is in bulk issue during April. And I think it's too close to the maturity date for both Halifax and HMRC to have reacted. I'd wondered if it was State Pension + Savings only and thereby ex-SA and receiving P810s every few years just to validate the overall income.

But the point you make is very appropriate. As (8yrs x 3 accounts) 24 year's worth of interest, at a stroke ..... could well do considerable damage to the over 65 personal allowance. And, double jeopardy, consequently has the potential to increase the overall tax liability.