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HMRC internal manual

Savings and Investment Manual

Accrued Income Scheme: outline of the legislation

Scope of the legislation

The Accrued Income Scheme legislation is a free-standing income tax charge on the transfer of interest-bearing securities, and is not part of the charge on savings and investment income in Part 4 of ITTOIA05. It was formerly to be found at sections 710 to 728 of ICTA88, and was rewritten in the Income Tax Act 2007, where it is now to be found in Part 12 (ITA07/S615 to S681). For tax years before 2005-06, tax on AIS amounts was charged under Case VI of Schedule D.

Chapter 1 introduces the charge on “accrued income profits”. Chapter 2 contains the body of the provisions, which explain when and to whom the scheme applies, how to calculate accrued income profits and losses and when they are taxed. Chapter 3 sets out how relief is obtained for accrued income losses. These are set against the interest from the security on which the loss is made, rather than being set against other accrued income profits.

The AIS applies to all interest-bearing securities except those treated as excluded securities. In addition, certain persons are excluded transferors for the purposes of the scheme. The effect of these exclusions is similar to the priority of charging rules in ITTOIA05/S366 (SAIM1070), in that accrued income profits arising as part of a trade are taxed as trading income, and the tax charge on certain other types of savings and investment income, notably deposit rights and certificates of deposit (SAIM2500) and deeply discounted securities (SAIM3000) takes priority over the accrued income charge.

The basic rules

ITA07/S616 to ITA07/S637 contain the basic charge to tax on accrued income profits.

Accrued income profits are normally computed by reference to transfers of securities which carry interest. There are four different types of transfer (SAIM4060). Interest accrues to a settlement day which falls within an interest period. Interest, transfers, securities, settlement day are all defined terms in the legislation.

Profits are treated as made on the last day of the interest period, and taxed in the tax year in which the last day of the interest period falls (ITA07/S628). If the settlement day falls after the last interest period, the profits are treated as made in the tax year in which the settlement day falls (ITA07/S630).

The person liable is the person treated as making the accrued income profits, that is, the transferor or the transferee of securities.

Exclusions

ITA07/S638 to ITA07/S647 exclude certain transferors and transferees from the rules. The most frequently applicable exclusion is for small holdings of £5,000 or less.

Special rules

ITA07/S648 to ITA07/S670 set out a number of special rules which

  • treat certain types of transaction treated as transfers, and exclude certain transactions from the AIS rules;
  • amend the calculations in certain circumstances.