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HMRC internal manual

Corporate Finance Manual

Loan relationships: special types of security: gilt-edged securities: taxing indexed gilts

Tax adjustment

CTA09/S399 will apply if a loan relationship is represented by an index-linked gilt-edged security. The amounts brought into account are determined using fair value accounting, subject to the adjustment specified in CTA09/S400.

Fair value

Depending on its classification, changes in the fair value of an asset can either appear in the income statement (profit and loss account) or statement of changes in equity in the company accounts - see CFM21610.

The adjustment to disregard the index-linked amount for periods from 1 January 2005 onwards is made to the fair value of the gilt. The fair value of the gilt will reflect current interest rates and accrued interest, as well as the index-linking.

The CTA09/S400 adjustment

CTA09/S400 excludes any debits or credits so far as they relate to or include movement in the index of prices by which the return on the gilt is calculated, from the company’s tax computation. The opening fair value of the gilt is increased or decreased by the amount computed as relating to changes in the prices index over the period. The difference between the opening fair value adjusted for the prices index under S399 and the closing fair value in the company accounts, is the amount taxed as the loan relationship credit (or relieved as the loan relationship debit). This amount thus reflects all movements in the fair value of the gilt (such as issue discount or premium or market discount or premium) other than those attributed to prices index movements.

CTA09/S400 applies

  • if the credits or debits to be brought into account are determined by looking at the value of the gilt at two different times, and
  • there has been a change in RPI between those times.

The ‘two different times’ will normally be

  • the beginning of the accounting period, or the date of purchase of the gilt,
  • the end of the accounting period, or the date of sale (that is, whenever the value of the gilt is brought into account).

For the security to be an index-linked gilt-edged security the return must be linked wholly or partly to an index of prices published by the Statistics Board, this includes the retail prices index (RPI) and the consumer prices index (CPI). Tables showing the changes are published on the website of the Office for National Statistics.