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HMRC internal manual

Savings and Investment Manual

Interest: specific inclusions: introduction

Amounts that are treated as interest

Certain income receipts are treated as interest for tax purposes, even though they may not constitute interest in a legal sense. Some of these are listed in ITTOIA05/S369. This list is not exhaustive, as other particular receipts are treated as interest by other parts of the Tax Acts.

Building society dividends

Investors holding certain types of building society account (usually called share accounts) are members of the society and receive what are technically dividends. These are taxed as interest ‘for the purposes of this Act’ (ITTOIA05/S372). That is, they are taxable as interest but treated as relevant investments for the purpose of deducting tax under ITA07/S850. SAIM9000 onwards has more about the deduction of tax.

Interest distributions from open-ended investment companies and authorised unit trusts

The most common types of collective investment schemes (CIS), in which members of the public are invited to invest, are authorised unit trusts (AUTs) and open-ended investment companies (OEICs). CTM48100 onwards explains what these are. Unit holders in authorised unit trusts, and shareholders in open-ended investment companies, may receive a share of the CIS’s investment income either in the form of an interest distribution or a dividend distribution (but not both together).

ITTOIA05/S373 (for OEICs) and ITTOIA05/S376 (for AUTs) taxes the interest distributions as interest, and UK individuals will almost always receive such distributions with tax taken off (CTM48600 outlines the circumstances in which gross payment can be made). The tax voucher which the investor receives from the CIS will make it clear whether the receipt is an interest or a dividend distribution.

An investor who holds accumulation units or shares, where the interest distribution is automatically reinvested in the fund, is still taxable on the distribution.

See SAIM6000 for more on collective investment schemes.

Industrial and provident society payments

A dividend, bonus or other sum payable to a shareholder in a registered industrial and provident society, or a UK agricultural or fishing co-operative, is treated as interest if it payable by reference to the person’s shareholding (ITTOIA05/S379). There is more detail about industrial and provident societies at CTM40500 onwards (SAIM20000).

Price differences on repos

There is background on repos (sale and repurchase agreements) at CFM46100 (SAIM20000). This explains that the repurchase price is normally equal to the original sale price plus an increment equivalent to interest on a loan of the same amount as the sale price for the period of the repo. Where the repurchase price is greater than the sale price the interim holder is treated for income tax purposes as receiving interest on a deemed loan to the original owner. This interest equals the difference between the sale and repurchase prices and is treated as due when the repurchase price becomes due and received when that price is received (ITA07/S607).

Where, exceptionally, the sale price is greater than the repurchase price the original owner is treated for income tax purposes as receiving interest on a deemed loan to the interim holder calculated on the same basis.

In the case of a net paying repo, the interim holder is deemed to make a manufactured payment to the original owner (CFM74320). The repurchase price is treated as increased by the amount of the deemed manufactured payment (ITA07/S604) when the difference from the sale price is calculated.

For payments arising on or after 01 January 2014, sections 604 and 607 have been replaced by simpler provisions at ITA 2007/S614ZD(1) and (2), which provide that any manufactured payment which is representative of interest will be taxed as interest in the hands of the recipient.