TDSI Bulletin 31 - 27 March 2009

This bulletin tells you about:

  • Qualifying Time Deposits (QTDs)

Please ensure the appropriate people in your organisation read this bulletin.

Enquiries about this bulletin should be addressed to the person named in the issuing email.

The Tax Deduction Scheme for Interest (TDSI) pages are available on the HM Revenue & Customs (HMRC) website.

Qualifying Time Deposits (QTDs)

HMRC have recently been asked to clarify the QTD rules, in particular the treatment of QTDs that 'pay away' interest before maturity. Below is new text (which we have agreed with the BBA (British Bankers' Association) and BSA (Building Societies Association)) to replace the text currently in the TDSI Guidance Notes.

'A Qualifying Time Deposit' (QTD) is not a relevant investment.

An account is a QTD if the terms & conditions for the account meet the five criteria below:

  • the deposit is at least £50,000
  • repayment to be made at a specified time within five years of the QTD being made
  • makes no provision for the right to repayment to be transferred
  • prevents partial withdrawals
  • prevents additions

If all of the above conditions are met in the terms & conditions the account will be a QTD even if it was not the intention of the Financial Institution to offer QTD accounts.

If the terms & conditions do not meet the criteria the account is not a QTD. So, for example, if the terms & conditions do not meet the criteria because they allow additions to the account, but the saver does not make any additions to the account, the account is still not a QTD.

Criteria 1 - £50,000

The deposit must be at least £50,000. If the account is not a sterling account, the deposit must be the equivalent of £50,000 at the time the deposit is made - if a change in currency rates mean the account deposit is less than £50,000 after the QTD has been taken out this is acceptable and the account will remain a QTD.

Criteria 2 – repayment within five years

The terms & conditions must specify the repayment date. This date must be within five years of the QTD being taken out - repayment on the fifth anniversary is not acceptable.

The repayment date must be specified at the outset - it is not sufficient that the deposit agreement says merely 'x days from the date notice to withdraw is given', it must give the actual date.

If a QTD matures on a non-working day it is acceptable to repay it on the next working day. It is also acceptable if it is paid out on the last working day prior to maturity.

Criteria 3 - repayment to be transferred

The terms & conditions cannot allow the capital to be repaid to a third party upon maturity.

Criteria 4 - withdrawals

The terms & conditions should make it clear that it should be the intention of the saver to leave their capital in the account until the maturity date. A Financial Institution may include a condition that an early withdrawal will incur a penalty. HMRC do not have the authority to prevent capital being returned to the saver before maturity, but will review cases where a Financial Institution has agreed to break a QTD to ensure the correct tax treatment of interest and to determine whether the deposit was ever in fact a QTD

Criteria 5 - additions

Additions to the account are not permitted - either by the saver or by the Financial Institution. You may offer an account where interest is paid before the maturity date eg monthly, but is 'paid away' to another account. If the terms & conditions allow the interest to be added to the original sum deposited for the purpose of calculating future interest, then the account will not be a QTD.

If a Financial Institution offers a QTD that pays away the interest to another account, but that interest, for system reasons, is credited to the account and subsequently 'paid away' on the same day without ever being added to the original sum deposited for the purpose of calculating future interest, then the account will remain a QTD.

Broken QTDs

Where any of the conditions cease to be met the QTD is broken and is no longer a QTD. Examples of a QTD being broken include:

  • additions to the deposit (including capitalised interest)
  • withdrawal of part of the deposit before it matures
  • pooling the deposit with other deposits

Where a QTD is broken Financial Institutions should pay any accrued interest referable solely to the period in which the deposit was a QTD without deduction of BRT (Basic Rate of Tax). If the deal continues to run to maturity following a partial withdrawal/addition after a QTD has been broken BRT must be deducted from any interest paid.

The bankruptcy of the saver does not mean the QTD rules have been broken. If the saver is declared bankrupt no action is necessary and the QTD will remain a QTD until maturity or until the account ceases to qualify as a QTD for some other reason eg a partial withdrawal.

Terms & conditions

The terms & conditions of a QTD should make it clear to the investor that the account is a QTD and therefore, interest will be paid without tax taken off. As the account is a QTD interest will not be added to the account balance so we would expect the terms & conditions to explain how the interest will be treated. If the terms & conditions meet the five criteria then interest must be paid gross - neither the saver nor the Financial Institution are able to change this.

The investor should be made aware that the interest forms part of their taxable income and should be reported on any Self Assessment tax return.

Roll-over

Interest added at the date of maturity can be rolled over as part of the deposit into a new QTD.

At maturity, if capital and/or interest is removed and the deposit falls below £50,000 the balance cannot be rolled into a new QTD but if the customer is:

  • a UK non-taxpayer then a form R85 can be completed
  • not ordinarily resident in the UK then a form R105 can be completed

Both of these options would allow the interest to continue to be paid gross.

Death of the saver

Where the holder of a QTD dies, the deposit can remain a QTD (and be entitled to gross interest) as long as the QTD conditions are not breached. But the QTD cannot then roll over into another QTD following maturity.

If an executor closes a QTD before maturity the account will cease to be a QTD on closure. Interest accrued up to the date of closure will be paid gross.

Example

Mr A, Mr B and Mr C each open a QTD on 1 August 2008.
The maturity date for each of the QTDs is 31 July 2011.
All 3 men die on 1 September 2010.

Mr A's executors inform the Financial Institution of his death but do not request the removal of funds from the QTD. The QTD has remained unbroken and interest will be paid gross on 31 July 2011.

Mr B's executors inform the Financial Institution of his death and request some of the capital to pay for his funeral expenses. They ask for £3,000 to be paid to them from the QTD on 7 September 2010. The QTD has now been broken and is no longer a QTD. The Financial Institution should pay all accrued interest up to 7 September 2010 gross. But the remaining capital is no longer in a QTD and any future interest must be paid net. It cannot be put into another QTD.

Mr C's executors inform the Financial Institution of his death and request all of the capital to distribute to his beneficiaries. The Financial Institution pays the capital to them on 7 September 2010. The Financial Institution should pay all accrued interest up to 7 September 2010 gross. And because there is no capital left there will be no future interest.