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HMRC internal manual

Savings and Investment Manual

HM Revenue & Customs
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Interest: taxation of interest: person chargeable: examples

Who is taxable: examples

Example 1

Harriet holds a portfolio of quoted company bonds through a nominee. Although the nominee’s name appears on the companies’ registers of bond-holders, Harriet is the beneficial owner of the bonds and the person entitled to the interest arising from them. Harriet is therefore chargeable to tax on the interest.

Example 2

Ian and his wife Mehta are divorced, with the decree absolute being granted on 29 December 2006. On 5 December 2006, a Court Order is made ordering Ian to transfer certain assets to Mehta. These include a building society account in Ian’s sole name. On 31 December, interest of £2,400 is credited to the building society account. On 2 January 2007, Ian writes to the building society asking them to change the account from his name to Mehta’s, and the building society acts on the request a week later.

Beneficial ownership of the account is transferred when the Court Order is made on 5 December 2006, even though the name on the account is not changed until later. (See the guidance at CG22423 on when assets are transferred on divorce or dissolution of a civil partnership - although this applies for capital gains tax purposes, HMRC would take a similar view where entitlement to interest is concerned.)

Mehta is therefore the person who is entitled to, and taxable on, the interest that is paid on 31 December 2006. There is no question of apportioning the interest for her period of ownership of the account - see SAIM2420.

Example 3

Keith holds a power of attorney enabling him to manage the financial affairs of his elderly mother. He opens an offshore amount in her name, in which he invests part of her capital. Interest is paid gross on this account, but is not shown either on Keith’s tax return or his mother’s.

HMRC open an enquiry into Keith’s business, and the HMRC officer discovers that money introduced into the business comes from his mother’s account. Keith admits that the money was not a loan, and he did not have his mother’s consent to use her funds in this way.

Keith is liable to tax on the interest earned on the account at the savings rate, but not at the higher rate. He is the person receiving the interest, even if he is not entitled to it. However, it is not part of Keith’s income and higher rate tax only applies to Keith’s income.