Accrued Income Scheme Flashcards
Why was the accrued interest scheme introduced
Tax avoidance measure to stop individuals selling their stock immediately before the interest became payable
The price people were getting for their shares included the interest that was about to be received.
As a result the profits would be taxed as capital gains instead of income (as it would have been had the individual received the interest)
What does the accrued income scheme apply to
‘Interest - bearing marketable stocks and bonds:
British governement securties (gilts) such as treasury stock and UK exchequer stock
local authority bonds
company loan stock
Who does it affect
Individuals trusts and estates (not companies)
Only UK residents
What is cum div and ex div
Cum div - with interest. If an individual sells a cum div bond the buyer will receive the interets
Ex div - without interest. If an individual sells an ex div bond they seller will still be entitled to the interest
What happens if someone sells their treasury stock after the Ex div date but before the interest payment date
They will still be entitled to the interest. They will have received a lower price as a result
What do we use to calculate the accrued interest
The nominal value of the stock. The amount it will be bought back for
eg £20,000 6% loan stock = annual interest 1200
Explain:
Seller cum div
Seller ex div
Buyer Cum div
Buyer ex div
Seller cum div received a higher price therefore accrued interest
Seller ex div received a lower price therefore rebate
Buyer Cum div paid a higher price therefore rebate
Buyer ex div paid a lower price therefore accrued interest
What is the formulae for a EX DIV (buy sell)
Interest payment * (B-A)/A
A = number of days since last interest paid to point of sale/ buy
B = total interest period
If rebate minus from next payment
What is the formlae for CUM DIV (buy or sell)
Interest payment * A/B
A = number of days since last interest paid to point of sale/ buy
B = total interest period
If rebate minus from next payment
What is the exemption
If the nominal value of an individuals total holding are less than £5000 at any time in both:
The tax year in which the next interest payment falls
The previous tax year
What must you do for CGT purposes
Exclude any accrued income for the ‘cost’
