Tax on interest on long term fixed rate bond

Hi rl11,

The amounts should be declared annually and this will be reported to HMRC directly.

Thank you.

Hi Tommy Leung,

Yes, that is correct.

Thank you.

Hi rl11,

The legislation is at:

Taxes Management Act 1970

Taxation of the interest is described in link below and in particular 'If an individual is unable to withdraw or have access to the interest when it is credited to their account, or has a specific product such as a bond, the interest will not arise and therefore they will not be taxable until they have access to the interest.' if this applies to you then the interest should be declared when you can access it(maturity).

SAIM2400 - Interest: taxation of interest: the tax charge

Thank you.

Hi HMRC, I found this thread as I had the same query as the original poster. I have read it all, and read the HMRC guidance linked. It made sense to me (even though surprising) until one reply from HMRC, and I would like clarification on that please. I will summarize my understanding first, then explain the confusion I have with the HMRC reply. My understanding from this is as follows: (a) where I have a savings account with a fixed maturity date and the terms do not allow me to access the money early, interest paid into that account (even if paid monthly) is treated as income in the year in which the account matures rather than the year in which the interest was paid into my account. (b) if I can withdraw the money in the account early (whether by closing the account or not), even if required to pay a penalty to do so, then the interest is treated as income in the year in which the interest is added to my account (because I could access it if i wished), even if I do not actually withdraw the money. (c) the guidance doesn't seem to deal with scenarios where the terms of the account allow access in limited special circumstances, but I assume the position would be that unless the circumstance actually arises, this does not change the above and as such interest is still treated as earned when the account matures. Is this correct? The HMRC reply that I am confused by was in relation to the question at the bottom of page 1 by rl11 where rl11 said: "Can you confirm that your advice is that I should ignore my statements that will show I received £200 interest for tax year 2022/23 and £480 for each tax year 2023/24 through to 2026/27 and £280 in 2027/28 and instead declare that I received all of the interest in 2027/28?" HMRC Admin 19 said: "The amounts should be declared annually and this will be reported to HMRC directly." For context it may be necessary to read the other posts in this thread by rl11 in which rl11 explains the situation they are asking about. In short, their situation is as per (a) and (c) in my post above. Given that, I do not understand why HMRC is saying to declare the interest annually in a situation where the taxpayer does not have access to the interest in that year (albeit it has been paid into the account). The reason I am asking this is my situation is the same as I understand rl11's situation to me.

I've been reading these posts with some interest. It is rather worrying that HMRC have suggested that the answer lies in the Taxes Management Act 1970. I'd love to know the section! The relevant statute is actually at section 370(1) Income Tax (Trading and Other Income) Act 2005, which requires that tax is to be charged on "the full amount of the interest arising in the tax year". The term "arising" is not defined in the Acts so HMRC's policy appears to be based on its interpretation of the relevant case law, limited though that appears to be. The policy is set out in HMRC's Savings & Investment manual but I share the confusion of other posters over how it accords with the case law cited therein. Turning to fixed-rate bonds, at one extreme we have the case where interest is paid out yearly or monthly to another account. No problem there, the interest is clearly taxable when it's paid out. At the other extreme, we have the situation where the interest (whether credited annually & compounded, or not) cannot be accessed until maturity. In this case, the interest will all be taxable (on HMRC's understanding of the law) in the tax year of maturity. If the bond can be encashed early subject to a penalty, HMRC clearly view the interest as being taxable in the year it is credited on the basis that it can, as a matter of fact, be accessed. Most non-ISA bonds no longer seem to offer this option but the bank will agree to encashment in "exceptional circumstances". What is HMRC's view on these bonds? Well I doubt that you'll get an authoritative answer on this forum but I would expect that the interest is not considered to be available until maturity - as payment is entirely at the discretion of the bank. This leaves us with the common situation of a bond, the terms of which give you the option of having interest paid into either the bond itself or a separate account. What if you choose to have it paid into the bond? Replies in this thread suggest that, having made that choice, the interest is all taxable in the year of maturity. This view was expressed by Martin Lewis in his weekly email yesterday. However, I have in the past read another view which suggested that HMRC took the opposite approach. The reasoning, presumably, was that the terms of the bond were such that the interest could be paid out but the bond-holder had made a personal choice to leave it in the bond. I have such a bond with Charter Bank which pays interest in two separate tax years over its 18-month term. I asked Charter how they would return the interest to HMRC and they advised that each year's payment would be returned separately. So, HMRC will expect to see this mirrored in my tax returns. Perhaps the best advice would be to ask the bank how they are going to report the interest to HMRC because, at the end of the day, this is what the latter will expect to see on your tax return and/or will include in your end-of-year tax calculation. If what you return to HMRC is the same as the information provided to them by the bank, you can presumably sleep easily.

Thank you seryozha. I should perhaps have also added to my post above that in my case (as with kl11) I had the option to have the interest paid into an external account (which would clearly avoid this issue) but did not choose that option because I didn't know about this issue and wanted to compound the interest easily. I have now changed it going forwards but still need to understand the position for the interest up to now. I have also now asked one of the two banks with whom I have this type of account (Atom), and they have said they will declare the interest that was paid into the fixed account in the current tax year as being earned in the current tax year (ie contrary to how I understood HMRC's position in this thread). I am awaiting a response from the other bank (Vanquis). I would welcome input from HMRC as to how this all fits together - is there a distinction depending on whether the customer had the option of having interest paid into a different account (which they can access) but chose not to do so thus it was paid into their fixed account which they cannot access versus a situation where the only option provided by the bank to the customer was to have the interest paid into the fixed account?

Seems to be getting complicated. Not wishing to add to the complexity but if this is mainly about 'accessibility'. I have a question about another account type... Let's say I have a 120-day NOTICE account (not a fixed rate account), paying monthly interest (on the 10th of each month). credited to the same account, and the account has been open for 2 years (thus far). As per Ts&Cs, Interest is compounded and not accessible until notice has been given and ellapsed. I would think that interest on my tax return should be the summation of interest credited from Apr 10 to Mar 10 inclusive for each tax year, But the above seems to suggest that it's not that straightforward, and I should start pushing the Dec 10 to Mar 10 interest into the NEW tax year (past Apr 5), given that these amounts would not have been 'accessible' before Apr 5 (due to the notice period, and notice not have been given). Is that really the case?? I hope not, given the administrative challenge this would cause. Thanks

@ TAXpayer123 I don't work for HMRC and am not a tax adviser but my view is that the situation you describe is different. Whilst you suggest that you can't access some of the interest in the tax year, in reality I think you can. You could do this by (for example) giving notice 120 days before 10th March that you wish to withdraw a certain amount of money, so if you specifically wanted to just withdraw the interest you could calculate what the interest will be and make a request to withdraw that amount of money. Similarly, if you wished to close the account entirely you could probably do that in the same way, and thus access the capital and the interest. It is true that if you miss the deadline for the request then you get to a stage where it is no longer possible to access the interest in the tax year, but I think that is a different point and I don't see why that changes the tax status of the money. Otherwise, you could have a situation where you did make a request in time but then later decided to cancel the request - I don't think the tax status of the interest can be changing depending on what requests are made and/or cancelled before actioning. I think the principle would be that you had the ability to get the money out, so whether you chose to do so or not, it is treated as being available to you. Logically, that suggests to me that the same principle could apply to my and rl11's scenario - ie we have the ability to get the interest paid into a separate account, so it should be treated as being taxable in the year it is paid into the account, whatever account we choose to get it paid into. It is one step removed from Taxpayer123's scenario because in the bond scenario we have a one time choice about where interest is paid and once paid to the fixed account, it cannot then be removed (whereas Taxpayer123 would have an ongoing, but time limited, option to get the money out of the notice account) - but the principle seems to me to follow, albeit it is contrary to what Martin Lewis / Money Saving Expert said in their email this week and I am unclear now what view HMRC is expressing on these forums. ---- For anyone following my own issues, Vanquis have now replied saying that I should declare the interest that was paid into the fixed account in the current tax year as being earned in the current tax year.

This subject just keeps going round in circles! My take is that we (the savers) should simply submit a tax return based on what our savings providers have told us they have submitted to HMRC - via the annual interest statement they provide. If the savings providers are submitting their figures (to us and HMRC) incorrectly, then HMRC should intervene and advise them they are reporting the figures incorrectly. Until (or unless) they do, it should be accepted by HMRC that savers are, in good faith, submitting what is correct and tax on interest should be applied based on what the savings providers state as annual interest.

Can I just add that C100's last post wasn't there when I made my last post? We seem to have come to the same conclusion!

I appreciate the efforts of those who have posted on this subject. It's nice to know I'm not alone. There are so many different opinions that I have sadly concluded it is safest, where possible, to have all interest payments of bonds that pay out in multiple tax years to pay to a separate accessible account, and avoid compounding altogether. It's a waste of effort and means some interest is lost, but it seems to be the only path that provides certainty. Reluctantly, adding to the complexity of scenarios already described: many fixed term savings accounts exceeding 1 year in duration allow the destination of interest payments to be specified: 'compound' or linked account. But this setting can often be changed right up to the first anniversary, and sometimes after that. Does the availability of such functionality, allowing the setting to be changed, alter how 'accessibility' is viewed? For example, for a 3 year bond where no withdrawals are permitted, either with or without penalty, if I specify 'compound' initially, does that mean interest is taxed only at maturity - because only then is it accessible? Or is it considered accessible in earlier years because I could alter the interest destination setting from 'compound' to linked account? Do banks, BSs and HMRC appreciate such nuances and report and tax accordingly? If not, interest may be taxed in a different tax year to that intended, and I might lose 20 or 40 per cent of income. Any clarification on these points would be appreciated.

I've spoken to banks and BSs where I hold accounts, and the range of views and general confusion is concerning. I'd be very grateful if an HMRC Admin would answer the following specific question, please: SAIM2400 states: If an individual is unable to withdraw or have access to the interest when it is credited to their account, or has a specific product such as a bond, the interest will not arise and therefore they will not be taxable until they have access to the interest. My scenario: I opened a fixed term three year savings account paying interest annually, that offers no facility, with or without penalty, for early access. It allows me to specify and subsequently change, should I so wish, where interest is to be paid each year: compound or linked account. If I choose compound, is the first year's interest taxable in the same tax year or at account maturity? Is it (a) or (b)? (a) "unable to withdraw or have access to the interest when it is credited to their account" is considered to be TRUE for this scenario. ie. I am unable to access the interest. OR (b) the account's facility for me to specify and change the interest destination - available up to the point when interest is paid, but not afterwards - means that I'm able to withdraw or have access to the interest (albeit by selecting a different destination - linked account - before interest is paid), but I choose not to. So, "unable to withdraw or have access to the interest when it is credited to their account" is considered to be FALSE for this scenario. ie. I am able to access the interest. Which is it? Thank you.

Hi C100,

You are correct with A and B.  Limited access is still access and as such would fall under B.
If you can access the interest during the term, regardless of the reason, you declare the interest each year.  
Where the interest cannot be accessed until the end of the term, then the interest is declared at the end of the term.

Thank you.

Hi 

C100,
 

Please refer to guidance at : Savings and Investment Manual    .

Thank you.

Can someone from HMRC please read and understand the issue and then give a reply which isn't simply referring to guidance that does not provide an answer?

I have tried to summarise my understanding of this entire issue in a single paragraph. It would be wonderful if HMRC Admin would confirm (or tell me where I am going wrong): My summary: Interest on bank accounts is taxable only in the tax year that it is ‘accessible’. Interest is generally always ‘accessible’ in the case of easy access or notice accounts. When it comes to fixed-rate accounts however, interest will not be taxable until the tax year that the product MATURES, provided that any interest is 1) credited to the account (not paid to an external account), and 2) where neither principal nor interest can be accessed until maturity (and account terms can never be changed), and 3) where the account cannot be closed early (even by paying a penalty), All of these conditions need to be satisfied, else interest is taxable in the year it is received (whether that be credited to the account, or paid out). Clearly, these rules are more important for fixed-rate accounts with an original tenor of 18 months and beyond / where interest could ‘move’ from one tax year to the next for the purposes of income tax. Thanks

Hi Taxpayer123

Please refer to guidance here:

SAIM2440 - Interest: taxation of interest: when interest arises

And associated links.

Thank you. 

@Taxpayer123 I think you have summarised the guidance correctly. However this is a nonsense and HMRC need to review the guidance! Clearly if you have interest paid monthly, quarterly or annually it "arises" when credited to your account - regardless of access to the interest. The total credited to your account each tax year is what the providers put on your annual interest statement and is also the amount of interest they report to HMRC. This is irrefutably the amount of interest you have received for each given tax year. It is utterly ridiculous to suggest that none of the interest arises until account maturity, unless no interest is credited until account maturity. I can understand that somebody unable to settle their tax bill until they gain access to their interest (at maturity) might argue that it does not arise until maturity but that is clearly an unusual exception. Under normal circumstances, interest obviously "arises" when it is credited to your account - any account - external or the same - accessible or not

@ HMRC Admin 25 I am afraid that the saim2440 examples are not clear enough or exhaustive enough. And I have this frustration with a lot of the HMRC manuals and guidance, to be honest. I am trying to conjure a single paragraph which covers everything (for the sake of all of us). I am sure that's possible. I just need your specific responses to ensure it's correct, please. Thanks

Hi tricky,

If the interest is added to a different account that you can then access then this would be declared annually.

Yes, banks and building societies notify HMRC annually of interest received.

Thank you.