What is a Thrift Savings Account?

Here’s a detailed overview:

What Are Thrift Funds?

Thrift funds include various savings clubs and arrangements where members make regular deposits. The most common types are:

• Holiday Clubs: Members save money over the year to cover holiday expenses.

• Christmas Clubs: Similar to holiday clubs, but specifically for Christmas expenses.

• Tontines: A type of savings arrangement where members contribute to a pool and receive dividends. When a member dies, their share is distributed among the remaining members. This continues until only one member remains.

Tax Treatment of Thrift Funds

1. Company Status:

• Incorporated Thrift Funds: These are treated as companies for tax purposes. They are subject to Corporation Tax (CT) on any profits they make, just like other companies.

• Unincorporated Thrift Funds: These may be subject to different tax treatments depending on their structure and whether they operate as partnerships or other entities.

2. Corporation Tax (CT):

• Following the withdrawal of an Extra Statutory Concession in 2001, thrift funds are no longer treated as outside the scope of Corporation Tax. This means they must pay CT on their profits.

• The standard CT rate applies, and thrift funds must file CT returns and comply with the usual tax obligations.

3. Tontines and the Life Assurance Act 1774:

• Tontines: These are subject to specific legal constraints. Under the Life Assurance Act 1774, tontines must comply with the requirement of insurable interest. If a tontine does not meet this criterion, it may be deemed void as a contract of insurance or life assurance.

• Insurance and Life Assurance Regulations: Modern regulations and legal interpretations may affect how tontines are structured and treated for tax purposes.

Key Points for Participants

1. Understanding the Scheme:

• Ensure you understand how the thrift fund operates, how returns are calculated, and the conditions for receiving your savings.

2. Tax Implications:

• Be aware that the tax treatment of any interest or dividends received from thrift funds may vary. While thrift funds themselves are subject to CT, individuals may also need to consider how returns are taxed on their personal tax returns.

3. Legal Considerations:

• Particularly with tontines, ensure the scheme complies with relevant legal requirements to avoid issues with insurability and validity.

Conclusion

Thrift funds, including holiday and Christmas clubs, as well as tontines, are treated as companies for tax purposes and are subject to Corporation Tax on their profits. Participants should be aware of how these funds operate and the potential tax implications. For specific legal and tax advice, consulting with a financial advisor or tax professional is recommended, especially for those involved in more complex arrangements like tontines.