It used to be a political issue - broadly speaking, Labour would not allow any personal loan interest but the Tories would. However, Thatcher changed that in 1979 by keeping the Labour changes but dropping the income tax rates to 60%.
But why would you want it to look like more? Just let it look like a single overdraft, together with a notified overdraft limit equal to the original size of your loan. You can then always pretend for yourself that the difference between the balance and the limit is your "savings sub-balance". By eliminating any explicit reference to a (virtual) deposit balance, it's easier to demonstrate to the tax people that there isn't one, and that therefore no taxable interest can be being paid on it.
"Ronald Raygun" wrote
You might prefer to keep one "sub-account" (perhaps call it your "current a/c"), into which your salary goes and monthly expenses are deducted, usually at just above zero. Transfer an amount each month into a "sub-account" which you call a "savings a/c". Leave the "mortgage sub-a/c" at a level amount. Then you can see at a glance how your finances are doing.
Just one big debit amount could be very confusing!
"Ronald Raygun" wrote
But no interest is being earned on it! Back when current accounts usually didn't pay any interest - did the taxman pretend that they did (because you could have transferred the loot into your proper savings a/c, which did pay interest)? Nope - no interest, no tax.
You can set up your own set of virtual sub-accounts in your own paper analysis book or wizzo spreadsheet, and leave the bank to deal with just the super-account.
Yes it is, even though the bank claim not to be paying it. The effect is that income stream which would have serviced interest charges is instead free to accumulate, and it will do so at the same rate as mortgage rate. Therefore at the end of the day your net worth will be the same as if the savings account had paid 5.5% net, and therefore it *has*.
Hey, I think I'd make a good chancellor, dontcha think?
"Ronald Raygun" wrote
What *actually* happens, is that you pay (say) 4.4Kpa interest on a 100K loan a/c, and get 0Kpa (net) interest on a 20K savings a/c (the "actual situation").
Are you trying to suggest above that, simply because this is *equivalent* to paying 5.5Kpa interest on the 100K loan a/c, and getting 1.1Kpa (net) interest on the 20K savings a/c (the "hypothetical situation"), that "...the savings account had paid 5.5% net..."? Well, it's *also* just as equivalent to paying 4.9Kpa interest on the 100K loan a/c, and getting 0.5Kpa (net) interest on the 20K savings a/c (the "second hypothetical situation"). So, according to your logic, the savings a/c has also actually "...been paid 2.5% net...". How can it be *both* 5.5%, *and* 2.5% - and any other figure we care to choose?!!
I think he was trying to say that,and he was wrong :-)
Well, what actually happens is that you pay £4.4k pa full stop.
It is a truism to say that £4.4k happens to be 4.4% of £100k, but that's about as irrelevant as would be noting that it also happens to be 8.8% of £50k, or 0.44% of £1M.
In point of fact the net indebtedness of the account holder to the bank is £80k, and their published interest rate is 5.5% pa, and *that* is the reason he pays £4.4k pa.
If the net indebtedness is *presented* as two accounts instead of just the one, then clearly there is a risk of those separate accounts actually being deemed by IR to exist. Obviously, if the bank really did run two separate accounts, a loan of £100k and savings of £20k, and if it did charge 5.5% on the loan account and if the net amount of money due in were £4.4k pa, then the loan account must be paying 5.5% net.
That's why it's safer, from the point of view of escaping assessment for deemed credit interest, not to have dual presentation, and instead just to show one account, with a real debit balance of £80k, and perhaps a wee mention that the account holder is entitled to increase his borrowing back to £100k at any time.
"Ronald Raygun" wrote
Exactly. The "full stop" bit means that you don't *receive* any interest. You just pay the 4.4Kpa.
"Ronald Raygun" wrote
Agreed. The only thing that matters is the *amount* of interest, not the percentage/algorithm used to calculate it.
"Ronald Raygun" wrote
It's not *only* those features you mentioned - you also need to take into account the way the percentage is applied to the balance. For instance, whether interest is accrued/applied/compounded, yearly/monthly/daily/continuously etc. Which is why all that the taxman does, is look at the *amounts* of interest that have been paid. He doesn't bother with the different percentages or algorithms...
"Ronald Raygun" wrote
Yes, but fortunately when HMR&C look, they can see that one account has no interest added to it (the 'savings' a/c), and the other a/c only has interest charged (the 'loan a/c').
"Ronald Raygun" wrote
That's all correct. But, just as the bank is allowed to choose it's method of applying interest (accrued/applied/compounded, yearly/monthly/daily etc), they're also allowed to choose what balance they apply the rate to. They choose the **offset balance**.
So loan a/c is charged 5.5% of 80K, which is 4.4K.
"Ronald Raygun" wrote
Did you mean "savings" a/c here? True, the loan a/c does charge 5.5% (of offset balance). But the savings a/c pays ZERO!
"Ronald Raygun" wrote
Hmmmm. You're suggesting that it's the dual presentation that's the problem? You think that HMR&C should work out an equivalent single interest rate which explains all interest being paid & received over the two accounts? OK...
Suppose someone has a "standard" mortgage loan for 100K, charging 5.0%, and a savings a/c holding 20K paying 3.0%. So, interest paid on the loan is 5.0Kpa and interest received on savings is
600pa [net payment: 4.4Kpa]. You're suggesting that HMR&C should come along and say "excuse me, your 'net indebtedness' is 80K, and you're paying net interest of 4.4Kpa so that must be 5.5% on both of the loan & the savings. Please pay us tax as though you were actually receiving 1,100pa on the savings a/c, not 600pa!" *Is* that what you're suggesting?BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.