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HMRC internal manual

International Manual

From
HM Revenue & Customs
Updated
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UK residents with foreign income or gains: corporation tax: Loan relationships: interest reflected in market value

There may be cases where a security is disposed of or acquired and accrued interest is brought into account as a credit not as `interest’ as such but as part of a credit reflecting the value of the security.

Example 1

A company using the mark to market basis disposes of a security with a face value of 100 cum-div (so that the purchaser and not the vendor receives the next interest payment) at a time when interest of 10 has accrued since the last interest payment date and additional interest of 5 will accrue by the next interest payment date. The company will bring into its computation only interest arising so it will not bring in anything in respect of accrued unpaid interest. However, this will be reflected in the disposal proceeds (110).

Example 2

A company using the accruals basis makes a special ex-div disposal (so that it receives the next interest payment) of a security with a face value of 100 in circumstances such that interest of 10 has accrued since the last interest payment date and additional interest of 5 will accrue by the next interest payment date. The disposal proceeds will be 95. The company will bring into its computation the interest of 10 which has accrued to the date of sale. The company may treat the additional amount of interest received (5) either as interest accruing after the date of sale of the security or as part of the disposal proceeds which it would then show as 100 (95 received plus the interest of 5 which accrues after the sale of the security).

In both cases there will be a credit in respect of the loan relationship which either comprises or reflects an amount in respect of interest. If this is paid net of foreign tax and tax credit relief is in principle allowable against the UK tax on the interest but the interest is included in a larger credit, the credit should be disaggregated in order to identify the part which reflects the interest and tax credit relief should be allowed, subject to the usual computational rules, against the UK tax which is computed by reference to the interest component of the credit.