De-mystifying the accrued income scheme.

The accrued income scheme was originally introduced to counteract a practice known as bondwashing – converting income into capital gains by disposing of securities when the price obtained reflects a significant element of accrued interest.

‘Securities’ include any loan stock or similar security of any government or public or local authority, or any company, or other body, whether or not secured or carrying a right to interest of a fixed amount or at a fixed rate per cent and whether or not in bearer form.

Accrued income (or allowances) is entered in boxes one to three of the additional information pages of the self-assessment return.

When securities are transferred, interest is effectively apportioned between the old and new owners so that the former is charged to income tax on the interest accrued up to the date of transfer while the latter is similarly charged on the interest accruing from that date.

HMRC helpsheet 343 example

8% Treasury Stock 2015 pays interest on 7 June and 7 December. So someone buying £10,000 nominal value of this gilt on 7 May knows that they will receive £400 interest on 7 June. (The nominal value of the gilt is the face value – the amount on which the interest is calculated.)

The amount of accrued interest to be added to the basic price goes up by the same amount every day. The total time between the last interest payment on 7 December and the next one on 7 June is 182 days. On 7 May, 152 days have gone by since the last interest payment was made. So the amount of accrued interest is £400 × 153∕182 = £334.

Where the security is transferred after the ex-date but before the payment date, the old holder will receive part of the interest to which the new owner is actually entitled and so the reverse of the above is applied.

All income and allowances under the accrued income scheme for a tax year are pooled to give an overall income profit or loss. If the figure is positive, the amount is taxable, generally with no credit due for any tax deducted.  If the figure is negative, the loss may be relieved as follows:

  • against interest received from securities of the same kind in the same tax year
  • if there are unrelieved losses, these may be carried forward and set off against interest received from securities of the same kind.
It should be noted that if the transfer takes place in tax year X but the next interest payment date is not until year Y the accrued income event is treated as having taken place in tax year Y.The accrued income scheme does not apply where the nominal value of securities in question does not exceed £5,000 on any day in the tax year in which the interest period ends or in the preceding tax year.

The broker’s contract note or investment reports will normally clearly indicate the amounts of any accrued income/allowance. If the gain arising on the disposal of the securities is a chargeable gain, the proceeds need to be adjusted to reflect the accrued income/allowance.

Article extracted from ACCA “In Practice” Newsletter