Accrued Income Scheme: the background to the Accrued Income Scheme
Accrued interest taxed as income not capital gains
Prior to the introduction of the Accrued Income Scheme (AIS), accrued interest included in the sale price of interest-bearing securities was not taxable as income. See Wigmore v Thomas Summerson and Sons Ltd (9TC577) and SAIM2250. This gave rise to a form of avoidance known as ‘bondwashing’ or ‘dividend stripping’, in which income was converted into capital gains. The AIS was introduced on 28 February 1986, and tackled the problem by taxing accrued interest on the transfer of securities as income. The legislation applies to most marketable securities, such as government or corporate bonds, but not to shares in a company.
From 1 April 1996 the AIS legislation ceased to apply to companies chargeable to corporation tax, which come within the loan relationships rules in Parts 5 and 6 of the Corporation Tax Act 2009 (CFM5000 onwards SAIM20000)). See the Company Taxation Manual (CTM59500 onwards) for transitional provisions. The guidance in SAIM therefore applies only to non-corporate taxpayers, such as individuals and trusts.
The name ‘Accrued Income Scheme’ is a convenient shorthand phrase for the legislation and is used in this way in this guidance.
Related anti-avoidance legislation
The transfers of income streams provisions also tackle the conversion of income from debt securities and shares into capital (see SAIM11000). This legislation is most likely to be applicable in the corporation tax context.
The charge to tax under the Accrued Income Scheme
Interest that accrues on securities within the AIS is treated as a payment to or by either the transferor or the transferee, depending on whether the sale of the securities is with or without the accrued interest (also referred to as sales ‘cum-dividend’ or ‘ex-dividend’ - see SAIM4020). The payments for each kind of security are aggregated. An excess of payments received over payments made is charged to income tax as accrued income profits for the tax year in which the period for which the interest is receivable ends. An excess of payments made over payments received gives rise to an accrued income loss. A loss is relievable by being set against the actual interest received.
The amount taxable as income is removed from both the sale and purchase considerations of the securities for capital gains tax purposes (TCGA92/S119 - see CG54500).
There are special rules dealing with
- particular types of transfer - such as those involving transfers with unrealised interest, variable rate securities, gilts, securities held as trading stock, securities held by trusts and charities;
- exemptions from the scheme in certain circumstances - for holdings of securities of less than £5000, certain types of trust and charities, personal representatives, traders, non-residents and others;
- special types of calculation - such as those where interest is in default, where new securities are issued, and for foreign securities.
SAIM4030 onwards explains the legislation in more detail.