SAIM4160 - Accrued Income Scheme: examples of transfers with and without accrued interest

Example 1

Anthony has a holding of £100,000 Treasury Stock 8¼% 2007, a British Government security which pays interest on 16 January and 16 July each year. He arranges for his holding to be sold on the Stock Exchange on 19 March 2006. The contract note from his stockbroker, dated 19 March 2006 contains the following information:

The contract note contains all the information that is needed for the purposes of the AIS.

• Treasury Stock 8¼% 2007 falls within the definition of ‘securities' – ITA07/S619
• the securities have been transferred, and the transfer is treated as taking place on 19 March because there was a contract for their sale made on that date – ITA07/S620
• the settlement day for the transfer is 20 March because under Stock Exchange rules bargains in gilt-edged securities are settled on the next business day – ITA07/S674
• the transfer is with accrued interest because the purchaser gets the right to the interest payable on 16 July 2006, the next interest payment day to fall after 20 March 2006 – ITA07/S623
• under Stock Exchange rules, accrued interest on gilts is accounted for separately from the bargain price, so the accrued amount is £1,315 – ITA07/S632
• the interest period in which the settlement day falls is the period 17 January 2006 - 16 July 2006 – ITA07/S673.

Accordingly in this interest period Anthony (the transferor) is treated as having received a payment £1,315 and the transferee as having made a payment of £1,315 (ITA07/S632).

Example 2

Facts as in Example 1, except that the sale takes place on 1 July 2006 which falls within the ‘ex- dividend’ period for the stock. The contract note from the stockbroker shows:

The transfer of securities is treated as made on 1 July 2006. The settlement day is 2 July 2006. The transfer is without accrued interest because this is an ‘ex-div’ sale where the seller retains the right to the interest payable on 16 July 2006 (ITA07/S633). The rebate amount is £352 and the relevant interest period is that from 17 January - 16 July 2006

Accordingly in this interest period Anthony (the transferor) is treated as having made a payment of securities of £352 and the transferee as having received a payment of £352.

Example 3

Stuffed Dodos Ltd is a UK company which has issued unquoted unsecured loan stock paying interest each year on the Tuesday following Easter Day. Thus in 2005 interest is payable on 5 April and in 2006 interest is payable on 18 April.

Joe Smith owns £10,000 nominal of this stock and agrees to sell £4,000 to his aunt Matilda. Under the agreement, which was made on 8 July 2005, Matilda is to pay £5,000 for the stock on 19 August. The interest payable on 18 April 2006 is at the rate of £5.50 per £100 nominal (5.5%).

Even though the loan stock is unsecured, it constitutes ‘securities' for the purpose of the scheme. The securities are treated as transferred on 8 July 2005 – ITA07/S620 (3).

The settlement day is 19 August because that is the day Matilda has agreed to pay for the securities and it falls before the next interest payment day following the agreement – ITA07/S674 (3). The transfer is with accrued interest (ITA07/S623).

Because the accrued interest is not accounted for separately, in calculating the accrued amount, the formula in ITA07/S632 (5) is used. A is the period from 5 April 2005 to 19 August 2005. B is the period from 5 April 2005 to 18 April 2006. I is the interest applicable to the securities for the period (5.5% x £4,000 = £220). The accrued amount is thus 137/379 x £220 = 79.

The interest period in which the settlement day falls is that from 5 April 2005 to 4 April 2006. Accordingly in that interest period Joe is treated as receiving as payment of £79 and Matilda as having made a payment of £79.