Interest: taxation of interest: the tax charge
The tax charge under ITTOIA05/S370 is on the full amount of the interest arising in the tax year. The word ‘arising’ has been the subject of a number of tax cases. It includes received and also credited to a bank account (Parkside Leasing v Smith (1984) 58TC282). It has a wider meaning than this. In Dunmore v McGowan (1978) (52TC307) it was held to include the ‘swelling of a person’s assets’ even where the person had no immediate right to the income. See the examples at SAIM2440.
Who is taxable on interest?
Under ITTOIA05/S371 (before 2005-06, ICTA88/S59 (1)), the person liable to tax on interest is the person receiving or entitled to the income.
Generally, the person liable to tax will be the person who is entitled to the interest - the beneficial owner of the interest-bearing account or other source of interest. Under ITA07/S10, an individual is charged at the savings rate on the interest (by virtue of ITA07/S12) if that person is only liable at basic rate, or at higher rate if their income is above the basic rate limit.
A person may be taxable on interest even if they cannot withdraw and spend the money. This is again illustrated by the case of Dunmore v McGowan (52TC307), where the taxpayer could not withdraw interest credited to a deposit account because the account had been charged as security for a business guarantee. It was held that the interest nevertheless was taxable - it ‘enured to the benefit’ of Mr Dunmore, because it would go towards discharging his liability even if he was called upon to pay under the guarantee.
This view was upheld in Coxon v Revenue and Customs Commissioners (2013) UK FTT/12(TC) where interest accruing on money in an escrow account which was intended to fund the purchase of an overseas property was held to represent taxable income of the buyer, despite the fact that the bank which had provided the purchase monies had retained the interest under a charge it had over the escrow account.
But if there is no way in which the person can benefit from interest accruing to an account - in other words, if they have no entitlement to the interest - they are not chargeable. HMRC staff should seek advice from CTISA (Financial Products Team) where there is doubt about whether or not someone is entitled to interest.
A person ‘receiving’ interest
The ‘receiving’ leg of ITTOIA/S371 comes into play only where someone receives the interest as an agent or bare trustee for another person. For example, in the case of Aplin v White (49TC93), an estate agent was held to be taxable on interest from clients’ money held in a deposit account, although he did not have to account to his clients for the interest.
In practice, it is only in exceptional circumstances that HMRC would argue that an agent or nominee is chargeable to tax on interest - see examples 1 and 3 at SAIM2410. In such a case, the person receives the income in a representative capacity and not because they are beneficially entitled to it. It is not their income as an individual and under ITA07/S11 tax is charged only at the basic (and not the higher) rate, and because the income is interest, the savings rate applies by virtue of ITA07/S12.