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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: special types of security: gilt-edged securities: taxing indexed gilts: example

Making the adjustment: example

In this simplified example, the only change in the value of the gilt relates to the RPI.

Jarrah Ltd subscribes £30,000 for 2.5% index-linked gilts on their issue on 1 July. The nominal value of the gilts is £30,000. Interest is payable 6 monthly on 30 June and 31 December. Accounts are drawn up to 31 December using the amortised cost basis.

RPI is 150 on 1 July, 153 on 31 December which gives a 2% change in RPI ((153 - 150)/150 x 100).

Accounts

The company accrues interest on the gilt in the normal way. £30,000 x 2.5% x 6/12 = £375.

RPI increases by 2% between July and the company’s accounting date at 31 December.

The company applies this increase to the issue price of the gilt to determine its balance sheet value. £30,000 x 2% = £600, so the gilt will be shown at £30,600 in the accounts.

The company accrues a total of £975 in the accounting period (£600 for the indexed rise and £375 for the interest).

Tax adjustments

S399 requires that the amount relating to RPI is excluded from the taxable credits. This is achieved by increasing the opening fair value of the gilt by the increase in RPI. The opening fair value of £30,000 is increased by the indexed rise of £600. The closing fair value is £30,600, so the only amount taken into account for tax purposes is interest of £375.