AP4852 - The Accrued Income Scheme: General and background to the scheme
These instructions give a basic guide to the Accrued Income
Scheme. They explain how the scheme applies to individuals and to
personal representatives. Detailed instructions about the more
complex aspects of the scheme are in IM4230 onwards. IM4242 and
IM4259 will help you if you are working a trust folder. If a member
of the public asks you about the scheme, make use of the leaflet
IR68 if you can.
The Accrued Income Scheme changes the way in which we look at
interest on most marketable securities other than shares. In the
past, interest which had accrued (that is arisen on the holding,
but not yet been paid) was treated for tax purposes as part of the
sale or cost price and considered as a capital item.
Under the Accrued Income Scheme interest for the period which
spans the date of sale is apportioned to and from the date of sale.
The amount apportioned up to the date of sale is subject to Income
Tax on the seller, and the amount from the date of sale is
similarly taxed on the purchaser. The accrued interest is removed
from both sale and purchase considerations for Capital Gains Tax
purposes. The way in which the scheme gets this result depends on
the terms of the bargain made between buyer and seller.
The instructions at AP4872 tell you where the entries for
charges and allowances under the scheme will be shown on the tax
returns. An RO should bring to the attention of the group leader
any such entry. REs will compute the relief or charge in
straightforward cases, and give instructions as to how to deal with
these amounts.
`Cum div' sales
When a marketable security such as a British Government Security is sold, the buyer usually becomes entitled to the next interest due. This kind of sale is known as `cum div'. As an interest payment date on a security approaches, its market price increases to reflect the increase in value of the buyer's right to the interest. In other words, the price reflects accrued interest. The scheme taxes sellers on this accrued interest, and gives tax relief for it to buyers.
`Ex div' sales
Not all sales of securities are `cum div'. Once a security gets within a month or so of an interest payment date, sales and purchases are usually on `ex div' terms. That is, the seller collects and keeps the next interest due after the sale. Consequently the market price of a security sold `ex div' reflects the fact that the purchaser will own the security for a short period from the date of purchase to the next interest payment date. This is a period over which interest accrues but for which the interest is received not by him but by the seller. The interest accrued over such a period is known as rebate interest. It is treated in the opposite way to the more normal accrued interest associated with a `cum div' sale. The scheme taxes buyers on rebate interest, and gives tax relief for it to sellers.
