Tax on accrued interest on corporate bonds

The discussion about accrued interest in another string reminded me of an issue I was never able to resolve: how is accrued interest taxed ? Is it treated as capital gain or as income ? The former would mean adding the accrued interest both to the purchase costs and and to the sale receipts. The latter would mean recording a negative item of income on purchase and a positive item on sale. Neither of these seems to make much sense. However I notice that my broker does not include any accrued interest on my annual statement for income tax purposes. Does this mean that the CGT approach is the right one ?


  • Accrued interest is treated as income, and must be added or subtracted from other interest received, and for non ISA holdings should be declared in a separate section on the tax return - SA101, first part which is for

    Other UK income
    Interest from gilt-edged and other UK securities, deeply discounted securities
    and accrued income profits

    Help Sheet for above -

    Mr broker does not show accrued interest on the anual statements, so I have to refer to the contract notes for that
  • If I remember correctly, as an individual you are only taxed on interest received during the tax year and not on accrued (but not paid) amounts.
  • Mine are all held in ISAS so doesn't apply to me but am interested nonetheless.

    Wozzitworth - is that really the way it works - if I were to purchase some bonds, outside of a tax wrapper, I pay the purchase price plus I pay to the owner an additional amount equal to the accrued coupon up to the date of purchase. And you seem to be saying that I am then liable to tax on that accrued interest. But surely the tax system should be to levy tax on "profit" and as at the date of purchase I have not made any profit on those accrued, the seller should be liable to tax on the accrued. I should only be liable to tax on the difference between the interest actually received (whenever that might be) and the accrued that I paid for when the bond was purchased.

    Is the clue not in the word "profits" in your quote:-

    "Other UK income
    Interest from gilt-edged and other UK securities, deeply discounted securities
    and accrued income profits"
  • Ah - and there was me worrying that the government had come up with another way of taxing us twice, rather like they now do with "Road Tax".

  • Apologies my explanation was rather on the clumsy side - I use the words "added or subtracted" without specifying when to add and when to subtract.
  • --Ah - and there was me worrying that the government had come up with another way of taxing us twice, rather like they now do with "Road Tax". --

    You'll have to explain that one to me. Isn't Road Tax like Council tax? I thought the best examples were fags, booze and fuel, where we're paying tax (VAT) on things already taxed (duty). Dontcha love it the way the establishment have got everyone trained into thinking that 'tax' means income tax? Pure genius! :-)
  • steven - used to be that if you bought a second hand car that was already taxed then the purchaser could get the benefit of the remaining tax. Government stopped that so now if I own a car on which, for example, the tax expires on Feb 28 and I sell it on February 2nd then I can't get a refund of those 26 days of tax that I've paid but the new owner can no longer wait until Feb 28 to pay tax - he has to pay the whole of February's tax too. So the Government now gets 2 lots of tax for the same vehicle for the whole of February.

    Hope that makes some kind of sense. You must not be a car owner in which case you might well feel that this is perfectly fair.
  • Thanks, I'd forgotten about that. Yes I'm a car owner but have worked abroad for a long time. The italian second hand car market isn't as active as the UK due to high cost of re-registering them.
    The car tax situation reminds me a bit of a few UK car parks where you pay to rent a space for 2 hours, but if you leave for only 1 hour, you're not supposed to give your ticket to someone else. Never saw the legality of that myself and certainly always gave my ticket away.
  • Thank you, Laughton. Could I clarify one point on timing. You are saying that where I buy a bond and pay accrued interest in Tax Year 1 but receive no interest in that year, I should deduct the accrued interest from the interest that I receive on that bond in Tax Year 2. What I cannot do is to deduct that accrued interest from other interest I receive (from other bonds) in Tax Year 1. That is right isn't it ! ?
  • Sumnergpn - you're confusing me with an accountant (which I'm not).

    You should have a look at the link provided by beekey above but the waya you have set it out is the same as mu understanding. The relevant piece from HMRC seems to be:-

    "This means that the year in which a profit is taxed, or in which a loss
    is relieved, will not always be the year the securities were transferred,
    particularly if the transfer happens near the end of a tax year."
  • My common sense understanding (without reading the link) , is that the accrued interest paid on purchase is deducted from the next coupon (to calculate income up to that point).

    If you sell a bond without getting a coupon, the interest is the difference in accrued interest paid (on purchase) and received on (sale).

    If you sell after receiving a coupon payment, then all of the accrued interest received on sale is income.
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