The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:
The accrued income scheme was originally introduced as an anti-avoidance measure in 1985 to bring what would otherwise be a capital gain within the scope of income tax. ‘Bond-washing’ was a practice whereby holders of securities (such as gilts or corporate bonds) would dispose of their stocks immediately prior to the date on which interest became payable. The price obtained for the security included the interest accrued on the stock, but the profit on the security was taxed under the capital gains rules rather than being treated as income.
The accrued income scheme calculates the accrued interest every time stock is transferred and allocates this proportion of the proceeds as ‘interest’ for income tax purposes. The interest is either an income tax ‘profit’ or an income tax ‘loss’ for the transferor (seller) or the transferee (buyer) depending on whether the stock is sold with or without the right to the next interest payment.
Accrued interest is savings income for the purposes of the income tax calculation and so the savings income tax rates apply, including the starting rate for savings and the savings nil rate band. See the Taxation of savings income guidance note.
The Gilts etc guidance note discusses the taxation of income arising from securities that fall under the accrued income scheme.
To understand how the accrued income scheme works, it is helpful to define some of the common terms used when calculating the adjustment to income.
It is common practice (even by HMRC) to use the terms ex-dividend (or ex-div) and cum-dividend (or cum-div) even though the return on the investment is interest not a dividend.
Cum-dividend means ‘with income’.
If the investor buys a security cum-dividend, he buys it with the right to receive the next interest payment (ie the
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