Accrued Income Scheme - Taxing Securities on Transfer

Contents

  • What is the Accrued Income Scheme?
  • What is this guide about?
  • What securities are covered?
  • Who is affected?
  • How does the scheme work?
  • What do I need to do?
  • Customer Service

What is the Accrued Income Scheme?

The Accrued Income Scheme determines how we treat any interest that relates to the period spanning the date of sale for tax purposes. You may be affected by the scheme if you transfer securities or have securities transferred to you.

What is this guide about?

This guide explains the basic rules of the scheme and will help you make the right entries on your tax return. It describes

  • which securities are covered
  • who is affected
  • how the scheme works, and
  • what you need to do.

When interest-bearing securities are transferred from one person to another the sale agreement will specify who is entitled to the next interest payment. In cum-divided sales the buyer will get the next interest payment, and the transfer price will have been increased to reflect the value of that payment. In ex-dividend sales the next interest payment will be paid to the seller and the transfer price will have been reduced to take that into account.

What securities are covered?

The scheme applies to interest-bearing marketable bonds and loan stock, for example

  • British Government Securities (gilts)
  • local authority bonds
  • permanent interest-bearing shares in a building society (PIBS), or
  • company loan stock.

It does not apply to ordinary or preference shares in a company, units in a unit trust, National Savings Certificates or bank deposits. It does not apply to certain securities called 'relevant discounted securities' where the investor's reward includes a discount or premium. You can find more information on relevant discounted securities in the guide enclosed with your tax return.

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Who is affected?

The scheme does not apply to companies chargeable to Corporation Tax for securities transferred after 31 March 1996.

If you are not a company you may be affected if you transfer securities or have securities transferred to you. Your transfers will be affected by the scheme unless your total holding of securities (not just the ones transferred) is small enough to be under the limit.

Your transfer is under the limit if the nominal value of your total holdings of securities did not exceed £5,000 at any time in

  • the tax year in which the next interest due date falls, and
  • the previous tax year.

Example 1

On 31 March 2003 you sell £4,000 nominal value of 8.5% Treasury Stock 2007, which pays interest on 16 January and 16 July. On 10 April 2003 you use the proceeds to buy £6,800 nominal of 5% Treasury Stock 2008. You hold no other securities at any time.

The 31 March 2003 transfer falls in the tax year to 5 April 2003, when the nominal value of your total holding of securities never exceeded £5,000. But the next interest payment on the sold securities is 16 July 2003, which is in the tax year to 5 April 2004. Because you bought £6,800 nominal of 5% Treasury Stock in that tax year, on 10 April 2003, you exceeded the limit and the Accrued Income Scheme applies to the 31 March 2003 sale.

You will need to ask your HM Revenue & Customs office for advice if

  • you are not treated as resident, ordinarily resident or domiciled in the United Kingdom for tax purposes, or
  • there is an interval of more than one year between interest payment dates on the securities.
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How does the scheme work?

The Accrued Income Scheme determines how we treat interest for the period that spans the date of sale for tax purposes. The scheme allocates the interest between buyer and seller. We tax

  • the seller on the income from interest that has accrued up to the date of transfer
  • the buyer on the income accruing from the date of transfer.

If you buy or sell securities through a bank or stockbroker, you will get a contract note that shows any accrued interest. Ask your HM Revenue & Customs office if

  • your contract note does not show accrued interest separately, or
  • you transfer securities, for example by way of gift, and no contract note is supplied.

The way we treat the accrued interest for income tax depends on whether you are a seller or a buyer.

Sellers

  • Cum-dividend sales. If accrued interest is added to the price you get, we will tax you on that amount.
  • Ex-dividend sales. If accrued interest is deducted from the price, you get a deduction for that amount against the next payment of interest.

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Buyers

  • Cum-dividend purchases. If accrued interest is added to the price you pay, you get a deduction for that amount against the next payment of interest.
  • Ex-dividend purchases. If accrued interest is deducted from the price you pay, you are taxed on that amount.

What do I need to do?

If there is a transfer of securities that the Accrued Income Scheme applies to, you must

  • work out the amount of accrued interest to be taken into account
  • decide whether you will be charged tax on the accrued interest or get tax relief for it
  • check which tax year the next payment of interest (following the date of transfer) falls in.

This is the related interest payment. It determines the tax year that the accrued income is taken into account for.

Example 2

This example shows the calculations for the transactions in Example 1.

On 31 March 2003 you sell £4,000 nominal value of 8.5% Treasury Stock 2007, which pays interest on 16 January and 16 July. The contract note shows that £71 accrued interest has been added to the sale price. So, we will tax you on this amount.

The next payment of interest on the sold securities is on 16 July 2003 (the tax year 6 April 2003 to 5 April 2004). We will tax you on the £71 in that tax year. When you complete your tax return for the year ended 5 April 2004 you must include the £71 to any other interest you received during the year.

On 10 April 2003 you buy £6,800 nominal value of 5% Treasury Stock 2008 which pays interest on 7 March and 7 September. The contract note shows that £27 accrued interest has been included in the total price you paid. So, you will get tax relief on this amount.

The next interest payment is on 7 September 2003 (the tax year 6 April 2003 to
5 April 2004). There is £170 interest paid to you on 7 September, but we will only tax you on £170 - £27 = £143. When you complete your tax return for the year ended 5 April 2004 you must reduce the £170 interest receipt by the £27 relief for accrued income.

If you make two or more transactions in the same kind of security with the same related interest payment, you must combine the results of those transactions to give

  • a net charge to tax, or
  • relief from tax, for that interest payment.

This is the only time that the results of transactions are added together.

These notes do not cover every point, but any HM Revenue & Customs Enquiry Centre will be pleased to help you. Addresses are in your local phone book under 'Inland Revenue'.

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Getting Advice

You can get advice from a professional adviser or organisation. You can also ask Citizens Advice Bureau. You can find them in The Phone Book or you can visit adviceguide.

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These notes are for guidance only and reflect the tax position at the time of writing. They do not affect your right of appeal.

Issued by HM Revenue & Customs Better Guidance Programme.

August 2005

© Crown Copyright 2005