View the related Tax Guidance about Gross interest
Interest received net or gross
Interest received net or grossInterest can best be thought of as compensation for the use (or retention) by one person of a sum of money which belongs to another. Therefore, in order for a payment to be interest, there must be a principal sum on which the interest is calculated and both amounts (the principal and the interest) must be due to the same person. See Simon’s Taxes E1.405.The most common forms of interest are the amounts paid by banks or building societies on deposits, although interest may also be paid by companies on amounts loaned by the person. The interest is either paid gross (no tax deducted) or net (after tax has been deducted) and the amounts are reported in different boxes on the tax return (see below).Irrespective of whether a person receives the interest gross or net of tax, it is the gross amount that is used to calculate the tax due. After the overall tax liability has been calculated, any tax already collected by the bank / building society will be deducted from the liability. For more on this, see the Taxation of savings income guidance note.It is the amount of interest that arises to the taxpayer in the tax year that is reported on his tax return. This is known as the receipts basis of assessment or the arising basis of assessment. For example, interest credited into the account on 6 April 2020 is not taxable in the 2019/20 tax year, as it is received
Valuing the estate
Valuing the estateOverviewWhen the personal representatives (or their professional advisers) have been through the deceased’s paperwork and have identified the institutions that may hold assets on behalf of the deceased, the next stage is to write to those institutions to notify them of the death, and to obtain details and asset values as at the date of death. There may also be liabilities of the estate which also must be valued as at the date of death. This guidance note will identify the information that should be requested from the institutions and provide sample letters.Prior to reading this guidance note, reference should be made to the IHT principles of valuation set out in detail in the Valuation of property guidance note. The personal representatives must identify the open market value of the assets at all times, as defined in IHTA 1984, s 160. This is the price the asset might reasonably be expected to fetch if sold in the open market immediately before the deceased died. The basis for valuation may be modified in certain circumstances, eg where related property is found. In addition, a discount may be applied to the open market value where an asset is held jointly with another. Personal representatives should be wary where assets are held by the deceased jointly with another to identify as to what percentage he owns, as it may not be 50%. Caution must be exercised when dealing with bank accounts owned by the deceased in which a second person
Investment income
Investment incomeIntroductionThis guidance note highlights some features of the taxation of investment income which apply specifically to trusts.InterestFor commentary on what constitutes interest and how it is taxed, see the Interest received net or gross guidance note.Up until 5 April 2016, interest received by trustees was subject to the same arrangements for deduction of basic rate tax at source, as that received by individuals. Trusts subject to standard rates of tax had no further liability beyond the 20% deducted at source. After that date, interest is to be paid without deduction of tax. Trustees are not entitled to the savings allowance introduced by FA 2016, which provides for individuals to receive up to £1,000 of gross interest charged at a nil rate. Consequently, following the abolition of tax deduction at source, trustees became liable to file a tax return to pay a tax liability on very small amounts of interest received. In recognition of the additional administrative burden on trustees, and indeed on their own resources, HMRC introduced a concession under which trustees need not declare and pay tax on interest where the only source of income is savings interest and the tax liability is below £100.These arrangements, originally introduced as a temporary measure for 2016/17, have been extended periodically up to 2023/24. These de minimis provisions do not apply to dividend income. F (No 2)A 2023 includes legislation which extends and codifies the concession from 2024/25 to trusts where the income is equal to or less than £500, divided
Interest in possession trusts ― income tax
Interest in possession trusts ― income taxIntroductionThis guidance note explains how to calculate the income tax liability on the income of an interest in possession trust. It also covers the general principles of income tax that apply to all trusts and identifies the features specific to an interest in possession trust.Trustees together are treated as if they were a single person (distinct from the individuals who are the trustees of the trust from time to time). In order to calculate the income tax liability for any trust, you first have to determine what type of trust it is. It is essential, when dealing with a trust for the first time, to read the trust instrument. As explained in the Taxation of trusts ― introduction guidance note, the income tax treatment will fall into one of two categories:•standard rate tax (bare trusts and all interests in possession), and•trust rate tax (discretionary and accumulation trusts)The nature of a discretionary interest and the income tax treatment is detailed in the Discretionary trusts ― income tax guidance note. Higher trust rates of tax apply to trustees’ accumulated or discretionary income.The income tax treatment of bare trusts is described in the Bare trusts ― income tax and CGT guidance note.An interest in possession is characterised by a beneficiary’s right to the income of a trust as it arises. The income belongs to the beneficiary, and the trustees have no authority to withhold it except to use it for legitimate expenses. The entitlement
Double taxation treaty passport scheme
Double taxation treaty passport schemeIntroductionWhere a corporate borrower other than a financial institution pays interest with a UK source to an overseas lender, then the general rule is that income tax must be withheld at 20%. This is subject to a significant number of exceptions such as the one related to interest on quoted Eurobonds in ITA 2007, s 882. Where a double taxation treaty exists between the jurisdictions of the borrower and the lender then WHT may be reduced partially or wholly on the making of a formal claim. For payments made before 1 June 2021, UK withholding tax on interest may also have been eliminated under the UK legislation which gave effect to the EU Interest and Royalties directive on a loan where an EEA company beneficially owns at least 25% of a UK company, or vice versa. Relief was not automatic and an application to HMRC by the overseas recipient was required in order to receive gross interest from a UK company. The UK legislation enacting the provisions of the Directive is repealed for payments made on or after 1 June 2021, by FA 2021, s 34. For additional information, see the Withholding tax on payments of interest guidance note. For general details on withholding tax (WHT) on interest, royalties and rental income, see the Withholding tax guidance note. Prior to the introduction of the double taxation treaty passport (DTTP) scheme, a time-consuming and onerous process was required for each and every loan issued. The overseas
Estate tax returns and other procedures
Estate tax returns and other proceduresIs a tax return required?Personal representatives (PRs) have a duty to report to HMRC any untaxed income received during the period of administration and any capital gains which have arisen in that period on the sale of property forming part of the deceased’s estate. See the Income tax during administration and Capital gains tax during administration guidance notes.In accordance with the general rule under TMA 1970, s 7(3), there is no requirement for the personal representatives to notify chargeability where the only income received has been taxed at source. For tax years up to 2015/16, it was often the case that all of an estate’s income was taxed at source, since for many estates the only sources of income are interest and dividends. In that case, no return was necessary.However, with effect from 6 April 2016, tax was no longer deducted at source on bank accounts, etc and the dividend tax credit was abolished. Currently, the legislation requires that even very small amounts of investment income arising within the estate should be reported and tax paid in relation to them. PRs are not entitled to the savings nil rate band (also known as the savings allowance or personal savings allowance), whereby individuals may receive up to £1,000 of gross interest without an income tax charge, nor are they entitled to the dividend nil rate (also known as the dividend allowance) which only applies to individuals. In order to reduce the administrative burden on PRs
Computing income for tax credits purposes
Computing income for tax credits purposesThis guidance note looks at the how the various components of income are calculated for tax credit awards.Migration of tax credits to universal creditNew claims for tax credits are no longer possible as they have been replaced by the universal credit for all claimants. Existing claimants will continue to receive tax credits until they are migrated to the universal credit system. Migration will take place when a change in circumstances is reported or when a migration notice letter is received. This is expected to be completed in 2024. There is information about migration notice letters on the GOV.UK website.See the Universal credit guidance note.Calculation of household income for tax creditsHousehold income for tax credits purposes is very similar to the taxable income of the claimant or the claimant couple. However, there are some key differences from the normal tax rules in both income and deductions.The statutory income definition is divided into four steps which you will need to work through in order. The income that is taken into account for both a single claim and a joint claim is the total income for the tax year irrespective of whether the claim is for an entire tax year. Where a claim relates to a part year, the income is calculated pro rata when the taper is computed. See the Computing the working tax credit and Computing child tax credit guidance notes for a discussion of how the maximum entitlement is tapered. Step 1 ― calculate
Extraction of funds following incorporation
Extraction of funds following incorporationThis guidance summarises some of the different methods of extracting funds from a newly formed company following incorporation of a sole trade or partnership. Detailed guidance on extracting profits from owner-managed companies can be found in the Effective profit extraction ― overview guidance note.SalarySalaries can be paid to the directors, either as regular sums or as more infrequent bonuses, and are tax-deductible for the company. If the director has an explicit employment contract, they will receive the national minimum wage (NMW) in respect of work carried out under that contract, so it would not be possible to pay such a director solely by way of dividends. The requirements of real time information (RTI) have made the payment of salary very rigid, and payments must be reported when made. There is also additional administration under this system that may negate any tax benefit from paying a nominal salary. This should be assessed on individual circumstances.A salary / bonus is subject to income tax in the hands of the directors.In addition to the Class 1 NIC payable by the directors / employees, the company will have to pay Class 1 secondary NIC on the gross salary /
Corporate interest restriction ― calculating tax-interest expense amounts and tax-EBITDA
Corporate interest restriction ― calculating tax-interest expense amounts and tax-EBITDAWhy do we need to calculate these amounts?This guidance note sets out details of the initial calculations a group will need to undertake for the purposes of the corporate interest restriction (CIR) regime. For a general overview of the regime, see the Corporate interest restriction ― overview guidance note.Having established who is part of the worldwide group, the next step to take when looking at the CIR is to calculate the aggregate net tax-interest expense for all companies in the worldwide group that are within the charge to UK corporation tax. In order to do this, it is necessary to calculate the net tax-interest expense (or income) for each relevant company and then sum these amounts. Details of how to go about this are set out under ‘Calculating tax-interest expense amounts’ below. Net tax-interest expense is also required to calculate tax-EBITDA.In order to undertake the CIR calculations in both the fixed ratio method (see the Corporate interest restriction ― fixed ratio method guidance note) and the group ratio method (see the Corporate interest restriction ― group ratio method guidance note), it is first necessary to calculate tax-EBITDA for each relevant company. Again, these figures are the aggregate for the worldwide group. Aggregate tax-EBITDA is the amount to which the fixed ratio (30%) or, if an election is made, the variable group ratio percentage (GRP) is applied when calculating a group’s interest allowance for a given period of account. Details of
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