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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Solicitors: Bank interest received: Solicitors’ rules

S369-S371 Income Tax (Trading and Other Income) Act 2005; S874 Income Tax Act 2007

Bank and building society interest on deposits of clients’ money may be held by the solicitor in two types of account. The tax treatment depends on the type of account used, as follows:

  1. Separate designated client account
    The client is entitled to the interest arising on the account and depending upon the status of the client the interest may be paid gross or net. The solicitor will simply pass on the interest gross or net to the client.
  2. General client accounts
    Deduction of tax does not apply to interest on a general client account.

Where money is deposited into a general client account the interest arises and is chargeable to the solicitor. At the same time, the solicitor owes his or her clients an amount corresponding to the funds deposited, and will account to each client for interest thereon.

Interest paid by the solicitor is taxable on the client as savings income.

The solicitor is to be taxed only on the amount of interest retained in the year (i.e. the difference between the interest received and the interest paid out). Where the amount paid to clients exceeds the interest received, the excess may be allowed as a deduction in computing the profits arising from the profession.

The tax treatment of the interest in the hands of the client is explained at SAIM2000+.

For details of whether the solicitor is obliged to withhold tax on interest paid to clients, see BIM65815.

Note that as the solicitor is a person by or through whom interest is paid, he is a ‘relevant data holder’ for the purposes of Sch23 Finance Act 2011. This means he can be required to produce details of these payments under the data-gathering powers (see BIM65820).

See BIM65830 as regards temporary loans made by solicitors.