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HMRC internal manual

Savings and Investment Manual

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HM Revenue & Customs
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Accrued Income Scheme: payments on transfers with accrued interest

Payments on transfer with accrued interest

The majority of transfers are made with accrued interest (‘cum div’), thatis, on the basis that the transferee will receive the next payment of interest. These aretaxable in accordance with the rules in ITA07/S632. The transferee is treated as making apayment to the transferor in the interest period in which the settlement day falls. Thepayment is the amount of the gross interest accruing to the settlement day, which in mostcases is shown separately from the consideration for the securities, under the arrangement(that is, the contract note) by which the transferee accounts to the transferor. This iscommonly known as the ‘clean price’ basis.

In exceptional cases – for example, sales off market, gifts, settlements, and deemedtransfers – there will be no contract note and it will it be necessary to compute theamount of the payment. Where this is done, the formula

I x A/B

is used.

I is the interest payable on the securities on the first interest day after the settlementday (‘the payment day’).

A is the number of days in the period up to and including the settlement day.

B is the number of days in the period ending with the payment day.

Example

Harriet sells corporate bonds to Howard on 15 March 2005. Interest is paid on the bondson 31 March, 30 June, 30 September and 31 December. Howard will receive the interestcoupon due on 31 March 2005, that is, the sale is cum div. The interest Howard receives is£200.

If Harriet agrees to sell the bond to Howard for a ‘clean price’ of £10,000plus an additional £165 for accrued interest, she is taxable on accrued income profits of£165 in 2004-05. Howard will reduce his accrued income profits by £165.

Suppose that, instead, Harriet simply agrees to sell the bond to Howard for £10,165. Therelevant interest period is 1 January to 31 March 2005, so B is 90 days. The number ofdays up to and including 15 March (A) is 74. So the “accrued amount” is £200 x74/90 = £164.44. Again, Harriet’s taxable accrued income will be £164, andHoward’s reduced by £165 (following the principle of rounding in the taxpayer’sfavour).

See SAIM4160 for more examples.