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HMRC internal manual

Savings and Investment Manual

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 aparticular payment of interest, but the settlement day for the transfer does not falluntil after that payment of interest has become due. This situation may arise in the caseof bearer securities with separate coupons, where the consideration for the transfer mayinclude an amount in respect of coupons which have become payable but which the transferorhas not presented for payment.

Where securities are transferred in such circumstances, the interest which has alreadybecome 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 thetransferor.

Where the settlement day falls within an interest period for the securities, the amount ofthe unrealised interest is treated as a payment made to the transferor, for the purposesof ITA07/S628. No one is treated as having made the payment, so the transferee does nothave accrued income profits or losses.

However, ITA07/S681 exempts the transferee from income tax on the unrealised interest insuch a case, unless they are excluded persons (SAIM4200onwards) and not therefore subject to tax on accrued income profit and losses. Thisprevents double taxation on the interest.

The charge on such securities is subject to the special rules on unrealised ‘interestin default’ (SAIM4290).

Where the settlement day falls outside an interest period (for example, where coupons onbearer securities are transferred after the principal amount of securities can itself beredeemed) the unrealised interest is treated as a payment under ITA07/S628. The transferoris therefore taxable for the tax year in which the settlement day falls.


In the example in SAIM4140, if the £200 interest payment onthe corporate bond for the period to 31 December 2004 had not been paid, and had beenincluded in the consideration paid by Howard to Harriet on 15 March 2005, it would be‘unrealised interest’. Harriet would be taxable for 2004-05 on accrued incomeprofits of £200 on that interest, as well as the £165 relating to the interest paymenton 31 March 2005.