Shirley took out a five year bond in 2005 which was due to mature on 1 September 2010. Under the 'Terms and Conditions' of the bond the interest would accrue for the life of the bond but would not be paid to Shirley until the date of maturity. As Shirley did not have any other income, and she expected the interest from the bond to be about £4,000 which would be less than the tax allowances she was due, she completed a form R85 so the interest would be paid without tax taken off.
Unfortunately Shirley died on 15 August 2010 and her family told the bank about her death a week later. When the bond matured, on 1 September, the interest was paid with tax of £800 taken off. This tax cannot be reclaimed on Shirley's behalf because, although the interest accrued over five years while she was alive, it was paid after she died. And interest is taxable when it was paid.
