Annex 28D
Tax on bank and building society interest – practice information
Since April 1996, savings income received by an individual, the estate of a deceased person or an interest in possession trust has been taxable at the lower rate (20%), unless in the case of an individual his or her total income makes him or her liable to higher rate tax, rather than the basic rate of tax (section 73 of the Finance Act 1996 inserting a new section 1A into the Income and Corporation Taxes Act 1988). This is relevant to the tax treatment of bank and building society interest received by solicitors.
The Solicitors’ Accounts Rules 1998, Part C
Under this part of the rules (‘the interest provisions’), a solicitor who is required to account for interest to a client may do so by either of two methods. He or she may:
(a) account to the client for the interest earned on the client’s money in a separate designated client account; or
(b) pay to the client a sum in lieu of interest when the money is held in a general client account.
These two procedures are referred to as Method A and Method B respectively.
Deduction of tax at source
The tax deduction at source rules apply, broadly, to separate designated client accounts, e.g. accounts held for individuals who are ordinarily resident in the U.K. Interest on general client accounts, whether with a bank or a building society, is paid gross.
When opening any separate designated client account the solicitor must provide the necessary information for the bank or building society to decide whether or not deduction of tax at source is appropriate.
Tax treatment of interest – Method A
Method A applies to separate designated client accounts. Where tax is deducted at source by the bank or building society interest will be received by the solicitor net, and he or she will simply pass it on to the client net – no tax deduction certificate is required. Interest from separate designated client accounts is taxable as savings income. The client, when making his or her tax return, will declare the interest as having been received under deduction of tax, and will only be liable to be assessed in relation to higher rate tax in respect of it (since he or she will have a tax credit for the lower rate of tax). If the client is for any reason not liable to income tax, he or she can recover any tax deducted from the interest. In those circumstances the solicitor must, on being required by the client, obtain a certificate of deduction of tax from the bank or building society and deliver this to the client. The client’s position is, therefore, for practical purposes, the same as that which arises where he or she receives interest from a building society or bank on a deposit of his or her own.
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