Tax Talk: Accrued Income

Tax Talk is a regular series written by FSL’s tax expert, Alex Ranahan. Alex has nearly ten years’ experience as a tax adviser and analyst. He is accredited by The Association of Taxation Technicians and was recently elected co-chair of the Tax Committee for The Investing and Saving Alliance.  

Alex’s Tax Talks are on general topics and are not tax or financial advice. If you are unsure of the tax treatment of a transaction, we encourage you to seek the appropriate tax advice. 

Common mistakes 

There are three common transactions we come across where accrued income has been applied incorrectly: 

  • A transfer of preference shares 
  • A transfer of deeply discounted securities 
  • A transfer made by a corporate investor 
Preference shares 

A common mistake is seeing a percentage symbol in the name of a preference share and applying accrued income to that share. This is incorrect because the accrued income provisions apply to transfers of loan stock and securities, including qualifying shares in a building society, but not to shares in a company. 

Similarly, unit trusts and other collective investment schemes are deemed to be companies and their units are treated as shares rather than bonds. This means there is no accrued income to calculate even if their distributions are treated as interest. 

Deeply discounted securities 

As you will see in this HMRC help sheet, deeply discounted securities are also not subject to the accrued income scheme.   

Since a gain on transfer of a deeply discounted security is already chargeable to income tax, and a loss cannot be offset against gains, there is no need to calculate amounts of income accrued up to the transfer. 

The most common occasions when this appears in practice are on UK and US Treasury Bills.   

A UK government security that is index-linked and not specifically a gilt is a deeply discounted security. Meanwhile, US government securities are usually index-linked and also likely to be deeply discounted securities. Accrued income is often booked on these securities in internal systems but for UK tax purposes it must be disapplied. 

Transfer by corporate investor 

Disapplication of accrued income is essential when the investor is a company. The accrued income scheme does not apply to corporate taxpayers at all and so any accrued income on a transaction must be ignored when reporting the corporate’s income and gains.