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HMRC internal manual

Savings and Investment Manual

Interest: solicitors' client accounts

Undesignated client accounts held by solicitors

Solicitors often hold money on behalf of their clients and invest this money in interest earning accounts. Where an account is opened specifically to hold funds on behalf of a particular client (a designated account), and the interest on the account is passed on to the client, that client receives interest which is taxable.

An undesignated account (that is, a general client account) is one holding funds on behalf of a number of different clients. Banks do not have to deduct tax from interest paid on such accounts (see BAM44030). Until 6 April 1998, the Revenue took the view that payments to clients out of such accounts were in lieu of interest, and the practice was to tax them under Schedule D Case VI. Following a review of the legal position, it was concluded that they were taxable under Case III. The change of practice applied to payments made on or after 6 April 1998.

Such payments are therefore savings income within ITA07/S18. The duty to deduct tax from payments from general client accounts is, however, disapplied by ITA07/S863 (see SAIM9020).

In most cases, the solicitor will have no intention of holding the client’s money on deposit for more than a year, so the payment will not be yearly interest. But where this is not so and the payment is made to a person living outside the UK (or the firm of solicitors is a company), the solicitor making the payment must deduct tax at the savings rate under Part 15 ITA07. See SAIM9000 onwards.

See also BIM65805 (SAIM20000).