SAIM4150 - Accrued Income Scheme: payments on transfers without accrued interest

Payments on transfer without accrued interest

ITA07/S633 deals with the case where securities are transferred without accrued interest (`ex div’), that is, on the basis that the transferor will receive the next interest payment. In this situation the transferor is treated as making a payment to the transferee.

As with ‘cum-div’ amounts, it is arrived at in one of two ways.

• If the transferor accounts to the transferee, under a market arrangement, separately for the consideration and for gross interest accruing from the settlement day to the next interest payment day (that is, on a ‘clean price’ basis), the payment will be the gross interest so accounted for.
• In any other case the payment is to be calculated by applying the formula I x A/B, where again I is the interest payable, A is the number of days in the interest period up to and including the settlement day, and B is the number of days in the period.

Example

The facts are as in the example in SAIM4140, except that the transferor, Harriet, will receive the interest coupon. If Howard pays a ‘clean price’ of £10,000 for the bonds, less a rebate of £35 to allow for the interest Harriet will receive, then Harriet is treated as making a payment of £35, while Howard is treated as receiving as payment of £35.

If the sale price of the bonds is simply expressed as being £9,965, it is necessary to time-apportion the interest coupon of £200 that is receivable on 31 March. Again, A is 74 days and B is 90 days, so the “rebate amount” is £200 x (90 – 74)/90 = £35.56. Harriet gets relief of £36, and Howard is taxed on £35.

See SAIM4160 for more examples.