Accrued Income Scheme: payments on transfers with unrealised interest
The transferor is taxable on transfers with ‘unrealised interest’
ITA07/S634 applies where securities are transferred with the right to receive a particular payment of interest, but the settlement day for the transfer does not fall until after that payment of interest has become due. This situation may arise in the case of bearer securities with separate coupons, where the consideration for the transfer may include an amount in respect of coupons which have become payable but which the transferor has not presented for payment.
Where securities are transferred in such circumstances, the interest which has already become receivable, and the right to which is transferred, is referred to as ‘unrealised interest’. In such cases the unrealised interest is charged to tax on the transferor.
Where the settlement day falls within an interest period for the securities, the amount of the unrealised interest is treated as a payment made to the transferor, for the purposes of ITA07/S628. No one is treated as having made the payment, so the transferee does not have accrued income profits or losses.
However, ITA07/S681 exempts the transferee from income tax on the unrealised interest in such a case, unless they are excluded persons (SAIM4200 onwards) and not therefore subject to tax on accrued income profit and losses. This prevents double taxation on the interest.
The charge on such securities is subject to the special rules on unrealised ‘interest in default’ (SAIM4290).
Where the settlement day falls outside an interest period (for example, where coupons on bearer securities are transferred after the principal amount of securities can itself be redeemed) the unrealised interest is treated as a payment under ITA07/S628. The transferor is therefore taxable for the tax year in which the settlement day falls.
In the example in SAIM4140, if the £200 interest payment on the corporate bond for the period to 31 December 2014 had not been paid, and had been included in the consideration paid by Howard to Harriet on 15 March 2015, it would be ‘unrealised interest’. Harriet would be taxable for 2014-15 on accrued income profits of £200 on that interest, as well as the £165 relating to the interest payment on 31 March 2015.