ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is adverse to some taxpayers and favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small. Change 106: Accrued income profits: meaning of “interest period” where consolidation of strips into a gilt-edged security occurs: section 673
This change drops the reference to a day “specified” in a consolidated gilt-edged security in section 710(13B) of ICTA.
Strips of a gilt-edged security may be consolidated back into a gilt-edged security by exchanging the strips for a newly issued gilt-edged security. The disposal of the strips is dealt with under the deeply discounted securities regime in Chapter 8 of Part 4 of ITTOIA. But the acquisition of the gilt-edged security is treated as a transfer for the purposes of the accrued income scheme, with the person making the exchange treated as the transferee, but no one being treated as the transferor. (See section 722A(3) and (4) of ICTA.) Under section 711(6A) of ICTA the transfer may be either with accrued interest or without accrued interest.
Under the accrued income scheme, where securities are transferred with accrued interest the transferee is allowed tax relief for the accruing interest and the amount of the relief is equal to the “accrued amount”. (See section 713(2) of ICTA.) Where securities are transferred without accrued interest the transferee is treated as entitled to a taxable sum and the amount of the sum is equal to the “rebate amount”. (See section 713(3) of ICTA.)
If the gross interest accruing on a security is accounted for separately, the amount of the “accrued amount” or, as the case may be, the “rebate amount” under section 713(4)(a) or (5)(a) of ICTA is equal to the interest so accounted for. However, in any other case (except where the settlement day is an interest payment day), the amount of the “accrued amount” or, as the case may be, the “rebate amount” is ascertained under section 713(4)(b) or (5)(b) of ICTA by time apportioning the interest applicable to the security for the interest period in which the settlement day for the transfer falls. Formulae are provided in section 713(6) of ICTA.
Where strips are consolidated into a gilt-edged security, the settlement day is the day of the transfer. (See section 712(4) of ICTA.) So the interest period for which the gross interest has to be apportioned is the one in which the exchange takes place. But the consolidated security may be issued part of the way through an interest period for securities of that kind. As it is intended to be fully fungible with other securities of the same kind, the formulae in section 713(6) of ICTA need to be applied by reference to the same interest period as that of those other securities. Under the source legislation this is dealt with through section 710(13B) of ICTA which deems the interest period of the consolidated security in which the transfer is treated as taking place to have begun “on such day as shall for that purpose be specified in the security”.
In practice, however, it appears that such a day is usually not specified in the security. So, as the consolidated security is intended to be fully fungible with other securities of the same kind, the specified day is in fact taken to be the day following the last interest payment day for such securities before the settlement day. Therefore, in defining “interest period” for Chapter 2 of Part 12, section 673 does not rewrite the special rule in section 710(13B) of ICTA. Instead, the rule in section 673(1)(b) will apply. So the interest period of the consolidated security will begin with the day following the last interest payment day of the kind of gilt-edged securities concerned before the settlement day.