CFM5944 - Taxing loan relationships: gilts: adjusting indexed gilts for the RPI

Making the adjustment

For accounting periods starting on or after 1 January 2005, FA96/S94 requires that the amounts brought into account to calculate the RPI adjustment for index-linked gilts should be determined using fair value accounting.

References to an “authorised accruals basis” or an “authorised mark to market basis” refer only to the position prior to 1 January 2005.

FA96/S94 excludes any debits or credits so far as they relate to or include movement in the RPI from the company's tax computation. It does this by looking at

The opening value of the gilt is increased or decreased by the percentage change in RPI. Any other changes in value, such as

are reflected in the accounts as normal, with no adjustment.

Mark to market – Prior to 1 January 2005

Prior to 1 January 2005 a company accounting for an indexed gilt on a mark to market basis was likely to be holding it on trading account. Where trading debits or credits arose prior to 1 January 2005, an adjustment under S94 was not required.

Prior to 1 January 2005 any non-trading credit from a rise in RPI would increase the opening fair value of the gilt by the same amount. A non-trading debit, from a fall in RPI, would reduce the opening fair value of the gilt.

Accruals – Prior to 1 January 2005

Even though the redemption amount would not be known for certain until the redemption date, the authorised accruals method used prior to 1 January 2005 brought in the expected yield at each accounting date, based on the rise in RPI for the period.

The opening value of the gilt was increased or decreased, under S94, by the amount brought in for changes in the RPI.

See the example at CFM5944a relating to periods prior to 1 January 2005, where the only change in the value of the gilt is due to the RPI and the gilt is held for non-trade purposes. For an explanation of the adjustment where the gilt is brought in at a discount or premium see CTM57640.

Fair value – From 1 January 2005 onwards

Depending on its classification, changes in the fair value of an asset can either appear in the income statement (profit and loss account) or statement of changes in equity in the company accounts – see CFM16115+.

The adjustment to disregard the index-linked amount for periods from 1 January 2005 onwards is made to the fair value of the gilt. The fair value of the gilt will reflect current interest rates and accrued interest, as well as the index-linking.

The opening fair value of the gilt is increased or decreased, under S94, by the amount computed as relating to changes in the RPI over the period. The difference between the opening fair value adjusted for RPI under S94 and the closing fair value in the company accounts, is the amount taxed as the loan relationship credit (or relieved as the loan relationship debit). This amount will reflect all movements in the fair value of the gilt, other than those attributed to RPI movements.

The method of calculation of the S94 adjustment using fair value is the same as shown in the example at CFM5944a using the accruals basis, except the opening value of the gilt is the opening fair value as given in the company accounts.