Tax on interest on long term fixed rate bond

I've just had an interesting discussion with Coventry BS, who phoned me when I raised the query. At the start my 3 yr bond I was given the choice to re-invest or pay out interest to my current account. I chose to re-invest, and I get annual statements (suggesting interest is paid annually), but I don't have access to the interest and can't close the account early. Coventry are saying that their position, and HMRC's position, is that the interest should be declared annually because the choice was available at the start of the bond.

sostupid, your clutching at straws argument may not be as stupid as it sounds. I raised a query with Coventry BS yesterday and they actually phoned me. I have a 3 yr bond with them, chose to re-invest the interest rather than have it payed out to my current account, and no early closure. They send me an annual statement showing annual interest payments. The person who phoned sounded pretty knowledgeable and said that Coventry BS & HMRC agreed to treat this account as annual interest & that's what should be declared on tax returns because there was a choice when opening the bond.

steveinkelso, Thanks for that, it gives me some hope at least. My concern is still that if the Coventry's is a universal approach, why is there all this debate in the first place - I don't recall having a long term fix that didn't offer to pay out the interest to another account but perhaps it happens. And if it's down to an agreement between HMRC and each different provider, why couldn't my provider tell me the situation - surely they would know. HMRC's own advice seems contradictory. SAIM2400 says "The word ‘arising’ ... was held to include the ‘swelling of a person’s assets’ even where the person had no immediate right to the income." The interest, shown on each annual statement, would presumably 'swell my assets' as it would be part of my estate should I die. SAIM2440 says, "Interest has been made available if it is credited to an account on which the account holder is free to draw." but then muddies the water with, "if a taxpayer does not actually receive interest (or have it credited to an account) until a later date, it does not normally form part of his or her taxable income until it is received." Why 'Normally'? All this confusion could be ended if the HMRC page "SAIM2440 - Interest: taxation of interest: when interest arises When does interest arise?" had an Example 4, showing what happens in the case we're all asking about. That it doesn't perhaps suggests that it's not as simple as we'd hope. I'm looking forward to HMRC's reply to my original question.

Hi sostupid,
This would suggest that you have access to any interest on an annual basis and should therefore be reported annually:
SAIM2400 - Interest: taxation of interest: the tax charge
Thank you. 

sostupid I also have the same situation with Aldermore, though they also have a further complication in that I can switch between interest payed in/out of account each year! I currently pay it into the bond. I've just checked with them and quote their reply - "Dear Mr XXX, Thanks for your secure message. Although you hold a 5 Year Fixed Rate Account, you have you interest paid annually. You should then declare the interest received to HMRC for the tax year in which it is paid to you. So although you have your interest paid into your fixed rate Aldermore account it is still paid to you annually so you should declare the interest you receive each tax year to the HMRC."

HMRC Admin 25 wrote, "This would suggest that you have access to any interest on an annual basis and should therefore be reported annually: SAIM2400 - Interest: taxation of interest: the tax charge Thank you. " Sorry but that makes absolutely no sense to whatsoever. What do you mean by "This"? The info in the link or what I wrote, and if the latter in which of my comments/questions? And it's not terribly helpful to link me to a page I quoted from and that clearly hadn't answered my question in the first place. Can we have an actual definitive answer please?

My takeaway from getting involved with this discussion as a layperson is that if someone gets annual interest statements from their bank and is informed by their bank that they should declare interest to HMRC annually, and it makes common sense, then that's what the vast majority of people will be doing, regardless of what the law says.

Hi sostupid,

If you can access the interest added to your account on an annual basis you need to report it. if you can only access the interest at the end of a fixed term eg 5 years, the interest would be declared in the year the fixed term ends.

Thank you.

Dear HMRC Admin 32, Please, why can't you read our questions fully and answer them properly? If constantly giving the same partial answer clarified the matter we wouldn't have to keep asking variations of the same question. It would also save you time, and I expect a deal of frustration on your part too, if you gave us just one full answer covering all the options rather than endlessly repeating yourself. In particular - On opening the account I have the option to have the interest paid into a different account or to have it reinvested. Does having that option mean the interest is taxed annually even if I opt to have it reinvested and cannot access it until it matures? I'm not even sure it's right that I "need to report it" if I can access the interest on an annual basis, as if I can then I, having so little income, wouldn't have to pay tax on it. Anyway, wouldn't my provider inform you? I've never told you about savings interest before, but you seem to know how much I receive. Thank you.

@steveinkelso - absolutely, without reading threads like this, the obvious thing to do is declare what your bank tells you has happened, and that's precisely what the majority of people would do. There is no "law" that says maturity or access are even relevant. What I would like to know is what the repercussions might be, if you declare interest received annually (in good faith) and it later comes to light that it ought to have been declared at maturity because of some technicality over when the interest was accessible or whether it could have be accessed at any point during the term.

Hi sostupid
UK banks/building societies are obliged to report intetest annually to HMRC so if you do not file a tax return it is irrelevant for you when you can access your interest and when to declare it.
If you are in self assessment though, you are required to report all your income even if covered by allowances.
You therefore need to know if the interest is taxable.
For a fixed rate bond that you cannot access the interest, then this is taxable in the year the bond matures.
Any account that you can access the interest annually, needs to be declared annually so for your senario as the account gives you the option to have it paid elsewhere, this will be declared annually.

After all this time, the original post: "Do I have to get the interest paid out in order to be able to declare the interest each year? Or can the fact that I have the option to have it paid out, mean I can still declare each year, even though I won't have access until 2027?" which is the same question as the sostupid post: "On opening the account I have the option to have the interest paid into a different account or to have it reinvested. Does having that option mean the interest is taxed annually even if I opt to have it reinvested and cannot access it until it matures?" Has been answered as: "Any account that you can access the interest annually, needs to be declared annually so for your senario as the account gives you the option to have it paid elsewhere, this will be declared annually." Therefore, is this finally confirmation that simply having the option to have interest paid elsewhere (even if not taken), means interest is declared annually and negates whether the interest can be accessed before maturity or not?

And yet again you don't answer the question which was, 'On opening the account I have the option to have the interest paid into a different account or to have it reinvested. Does having that option mean the interest is taxed annually even if I opt to have it reinvested and cannot access it until it matures?' I need to know which option I should choose when I open a new account next week. Less importantly, I pointed out that SAIM2400 says, "The word ‘arising’ ... was held to include the ‘swelling of a person’s assets’ even where the person had no immediate right to the income." So how does that match what you say? HMRC need to clarify the whole situation - surely any reasonable person would assume that interest is paid when it appears in their account, and HMRC should work on those lines.

Hi rl11,

That is correct.

Thank you.
 

Hi sostupid,
It will be taxed on an annual basis.
Thank you. 

Reading the most recent posts by sostupid, rl11, HMRC Admin 20 and HMRC Admin 25 it appears that the answer being given is: It is the PROVISION of a facility/option on the savings account for the customer to be able to access interest annually that determines that interest will be taxed annually (and not just at final maturity) regardless of whether that facility/option is CHOSEN by the customer, or compounding is selected instead. Can you please confirm? Please note this issue not only affects tax reporting, but also those wishing to make use of annual allowances throughout the term of a multi-year account and wondering if their choice of account options (compounding in particular) will have any bearing on achieving that. I'm sure clarity would be welcomed by many. Thank you.

Hi tricky,
We can only point you in the direction of the guidance, so that you can review the guidance and this should  allow you to make an informed decision. If, after that you still need advice, you need to employ the services of a financial adviser. 
SAIM2440 - Interest: taxation of interest: when interest arises
SAIM2400 - Interest: taxation of interest: the tax charge
Thank you. 

I've not seen anyone mention the problem of those who've already been paying tax annually on interest on these bonds for years. I spoke to HMRC this morning and after he'd checked on the SAIM guidelines (it was worrying that he didn't know about this until he'd looked) I was told that I had to amend my last 2 years tax returns and put in written claims for previous years so that all the tax is returned to me. Then I can pay it when due at maturity, some in just a year or so, Crazy! I was also told to ask each of my banks and building societies (12 of them) what their individual policies were on taxation. You can imagine the sort of response I got from the helplines I tried! At the best they all said it was nothing to do with them and speak to HMRC! This is going to take me months to sort out.

Further to my last comment 3 days ago I wonder whether other people have been given the same advice as me if they are part way through long term bonds i.e. to claim the tax they have already paid. I am finding this an almost impossible task, For one thing I don't know when the policy of paying at maturity came in. Only NS&I have given a specific date (1st May 2019). Does this date apply to all other bonds too? If not when did the advice in the SAIM start? I have some bonds that I opened in December 2018. Should these be included or not? Also I have some bonds that I've renewed every 5 years since 2010. They keep the same number and the interest is not separated between the "old" and "new" bond at renewal, just one figure. So I don't know how much I've paid in total since the last renewal. I also cannot find which bonds this applies to and which it doesn't. Phoning the banks etc gets nowhere. some are even adamant that they report nothing to HMRC. What would happen if I didn't claim the tax back but continued to pay annually as before for these long term bonds (I have nearly 40 bonds)? If there a risk that I could have a demand for all tax due at maturity and end up paying twice? Is this risk higher than that I'm paying at maturity on bonds that I should have paid annually? I'd have thought HMRC would be happy to get tax early rather than later.

Hi,

The guidance was first published on 19/3/2016. If you have declared income when the rules state you shouldn't, you can ask for an amendment. As we can only go back 4 years, 19/20 is the

first year that you can have reviewed. Maturity dates is between you and NS&I or any other provider that you have the bonds with and again any interest on statements is for you to discuss

with the provider to give you a breakdown. As you are now aware of the situation, there would be no need to declare annually if you do not meet the criteria so would not be paying the tax

twice and the interest would be correctly declared and taxed when it should be.

Thank you.