TDSI bulletin 39
Updated 6 April 2016
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This content is obsolete from 6 April 2016.
1. Taxation of qualifying time deposits (QTD’s)
The changes announced at Budget 2012 affect any new QTD made on or after 6 April 2012. HM Revenue and Customs (HMRC) will update guidance but until then the revised QTD section is reproduced below.
1.1 Qualifying time deposits - Section 2.17 - S866
An account is a QTD if the terms and conditions for the account meet the criteria below:
- the deposit is at least £50,000
- repayment to be made at a specified time within 5 years of the QTD being made
- it makes no provision for the right to repayment to be transferred
- it prevents partial withdrawals
- it prevents additions
A QTD made on or after 6 April 2012 can be a relevant investment (see para 2.1) and if it is the deposit will be subject to tax deduction scheme for interest. (TDSI).
If all of the above conditions are met in the terms and conditions the account will be a QTD even if it was not the intention of the financial institution to offer QTD accounts.
If the terms and conditions do not meet the criteria the account is not a QTD. So, for example, if the terms and conditions do not meet the criteria because they allow additions to the account, but the saver does not make any additions to the account the account is still not a QTD.
Criteria 1 - £50,000
The deposit must be at least £50,000. If the account is not a sterling account, the deposit must be the equivalent of £50,000 at the time the deposit is made. If a change in currency rates mean the account deposit is less than £50,000 after the QTD has been taken out this is acceptable and the account will remain a QTD.
Criteria 2 – repayment within 5 years
The terms and conditions must specify the repayment date. This date must be within 5 years of the QTD being made; repayment on the fifth anniversary is not acceptable.
The repayment date must be specified at the outset. It is not sufficient that the deposit agreement says merely ‘x days from the date notice to withdraw is given’, it must give the actual date.
If a QTD matures on a non working day it can be repaid on the next working day or it can be repaid on the last working day prior to maturity.
Criteria 3 - repayment to be transferred
The terms and conditions cannot allow the capital to be repaid to a third party upon maturity.
Criteria 4 - withdrawals
The terms and conditions should make it clear that it should be the intention of the saver to leave their capital in the account until the maturity date. A financial institution may include a condition that an early withdrawal will incur a penalty. HMRC do not have the authority to prevent capital being returned to the saver before maturity, but will review cases where a financial institution has agreed to break a QTD to ensure the correct tax treatment of interest has been followed and to determine whether the deposit was ever in fact a QTD
Criteria 5 – additions
Additions to the account are not permitted, either by the saver or by the financial institution. An account may be offered where interest is paid before the maturity date, eg monthly, but is ‘paid away’ to another account. If the terms and conditions allow the interest to be added to the original sum deposited for the purpose of calculating future interest, then the account will not be a QTD.
If a financial institution offers a QTD that pays away the interest to another account, but that interest, for system reasons, is credited to the account and subsequently ‘paid away’ on the same day without ever being added to the original sum deposited for the purpose of calculating future interest, then the account will remain a QTD.
1.2 Deduction of tax from QTD interest - Section 2.17a
A QTD is not a relevant investment if the deposit was made before 6 April 2012. If the deposit is made on or after 6 April 2012, the deposit will be a relevant investment (and tax must be deducted from any interest paid), if any of the conditions in paragraph 2.1 apply. But if the customer is:
- a UK non-taxpayer and not liable to pay tax, a form R85 can be completed, or
- not ordinarily resident in the UK, a form R105 can be completed
Both of these options will allow the interest to be paid gross.
1.3 Broken QTDs - Section 2.17b
Where any of the conditions cease to be met the QTD is broken and is no longer a QTD. Examples of a QTD being broken include
- additions to the deposit (including capitalised interest)
- withdrawal of part of the deposit before it matures
- pooling the deposit with other deposits
Where a QTD set up before 6 April 2012 is broken, financial institutions should pay any accrued interest referable solely to the period in which the deposit was a QTD without deduction of basic rate tax (BRT). If the deal continues to run to maturity following a partial withdrawal/addition after a QTD has been broken, BRT must be deducted from any interest paid if the investment is now a relevant investment (see paragraph 2.1).
The bankruptcy of the saver does not mean the QTD rules have been broken. If the saver is declared bankrupt no action is necessary and the QTD will remain a QTD until maturity or until the account ceases to qualify as a QTD for some other reason, eg a partial withdrawal.
2. Terms and conditions
The terms and conditions of a QTD should make it clear to the investor that the account is a QTD and therefore, if the deposit was made before 6 April 2012, interest will be paid without tax taken off. For deposits made after 5 April 2012, BRT must be deducted from any interest if the QTD is a relevant investment (see paragraph 2.1). As the account is a QTD, interest will not be added to the account balance so the terms & conditions should explain how the interest will be treated.
The investor should be made aware that the interest forms part of their taxable income and should be notified to HMRC if necessary.
3. Roll over
Interest added at the date of maturity can be rolled over as part of the deposit into a new QTD. If the rollover takes place on or after 6 April 2012, the deposit will be a relevant investment if any of the conditions in paragraph 2.1 apply and BRT must be deducted from any interest paid. At maturity, if capital and/or interest is removed and the deposit falls below £50,000 the balance cannot be rolled into a new QTD.
4. Death of the saver
Where the holder of a QTD made before 6 April 2012 dies, the deposit can remain a QTD (and be entitled to gross interest) as long as the QTD conditions are not breached. But the QTD cannot then roll over into another QTD following maturity.
If an executor closes a QTD made before 6 April 2012 before maturity, the account will cease to be a QTD on closure. Interest accrued up to the date of closure will be paid gross.
Example:
Mr A, Mr B and Mr C each open a QTD on 1 August 2008. The maturity date for each of the QTDs is 31 July 2011. All 3 men die on 1 September 2010.
Mr A’s executors inform the financial institution of his death but do not request the removal of funds from the QTD. The QTD has remained unbroken and interest will be paid gross on 31 July 2011.
Mr B’s executors inform the financial institution of his death and request some of the capital to pay for his funeral expenses. They ask for £3,000 to be paid to them from the QTD on 7 September 2010. The QTD has now been broken. The financial institution should pay all accrued interest up to 7 September 2010 gross. But the remaining capital is no longer in a QTD and any future interest must be paid net if the deposit is a relevant investment (see paragraph 2.1).
Mr C’s executors inform the financial institution of his death and request all of the capital to distribute to his beneficiaries. The financial institution pays the capital to them on 7 September 2010. The financial institution should pay all accrued interest up to 7 September 2010 gross.
Future Articles
Part of the purpose of the TDSI bulletins is to clarify areas of the TDSI guidance notes. If you feel that any aspect of the guidance is unclear contact:
Shan Jones
Telephone 0151 472 6269.