Interest: taxation of interest: when interest arises
When does interest arise?
ITTOIA05/S370 provides that tax is charged on the full amount of interest arising in the tax year. This means that a person receiving interest cannot set off any interest payable, bank charges or similar amounts against sums chargeable under ITTOIA05/S369.
Interest ‘arises’ when it is received or made available to the recipient. Interest has been made available if it is credited to an account on which the account holder is free to draw.
Jonathan has a building society account, on which interest is credited every 31 December. He is free to make withdrawals from the account, at 30 days’ notice, but has not withdrawn money for many years. In April 2004, he receives a tax deduction certificate showing net interest of £524 credited to his account on 31 December 2003. He should return the interest as income of year ended 5 April 2004, even though he has not withdrawn it.
Interest can in practice often be treated as arising when it becomes due and payable. However, if a taxpayer does not actually receive interest (or have it credited to an account) until a later date, it does not form part of his or her taxable income until it is received.
In January 2005, Jennifer makes a loan of £5,000 to her cousin to help him set up a business. They agree that interest will be payable quarterly in arrears at a rate of 5% per annum. But the business initially struggles, and Jennifer does not receive any interest until June 2008 when, after she threatens legal action, her cousin repays the debt along with interest arrears of £875. Jennifer is not required to pay any tax on the interest until 2008-09. Equally, however, the whole £875 is taxable when she receives it. She cannot spread back the arrears of interest over the years in which it accrued.
Interest on a judicial award should normally be regarded as arising on the date on which it is paid.
Decided cases which embody these general principles include Dewar v CIR (19TC561), Dunmore v McGowan (52TC307), Parkside Leasing Ltd v Smith (58TC282), and Peracha v Miley (63TC444).
For cases involving claims of Ponzi (and Ponzi-type) schemes submit to Financial Products team at CTISA for advice.