SAIM2200 - Interest: specific inclusions: introduction

Amounts that are treated as interest

Certain income receipts are treated as interest for tax purposes, even though they may not constitute interest in a legal sense. Some of these are listed in ITTOIA05/S369. This list is not exhaustive, as other particular receipts are treated as interest by other parts of the Tax Acts.

Building society dividends

Investors holding certain types of building society account (usually called share accounts) are members of the society and receive what are technically dividends. These are taxed as interest ‘for the purposes of this Act’ (ITTOIA05/S372). That is, they are taxable as interest but treated as dividends for the purpose of deducting tax under ITA07/S850. SAIM9000 onwards has more about the deduction of tax.

Interest distributions from open-ended investment companies and authorised unit trusts

The most common types of collective investment scheme (CIS), in which members of the public are invited to invest, are authorised unit trusts (AUTs) and open-ended investment companies (OEICs). CTM48100 onwards explains what these are. Unit holders in authorised unit trusts, and shareholders in open-ended investment companies, may receive a share of the CIS’s investment income either in the form of an interest distribution or a dividend distribution (but not both together).

ITTOIA05/S373 (for OEICs) and ITTOIA05/S376 (for AUTs) taxes the interest distributions as interest, and UK individuals will almost always receive such distributions with tax taken off (CTM48600 outlines the circumstances in which gross payment can be made). The tax voucher which the investor receives from the CIS will make it clear whether the receipt is an interest or a dividend distribution.

An investor who holds accumulation units or shares, where the interest distribution is automatically reinvested in the fund, is still taxable on the distribution.

See SAIM6000 for more on collective investment schemes.

Industrial and provident society payments

A dividend, bonus or other sum payable to a shareholder in a registered industrial and provident society, or a UK agricultural or fishing co-operative, is treated as interest if it payable by reference to the person’s shareholding (ITTOIA05/S379). There is more detail about industrial and provident societies at CTM40500 onwards ( SAIM20000).