SAIM4300 - Accrued Income Scheme: special calculations: interest in default: application of rules

Cases where the issuer has defaulted on interest: practical points

Where a security is transferred and it is claimed that the interest in default rules apply, HMRC staff should take into account the amounts of interest involved in deciding whether or not to make further enquiries. In most cases the taxpayer’s valuation of the unpaid interest can be accepted. Where the transfer is not on the open market, a check should be made that the same valuation is used by the transferor and the transferee.

Where a payment is made in respect of a security in default, it will be a question of fact as to the extent that the payment relates to a repayment of principal or a payment of interest, and in the latter case to which unpaid interest coupon it relates. Normally it should be possible to decide this by reference to the terms on which the payment is made.

The amount of relief due to the transferee is fixed by the valuation of the interest at the time of the transfer to him. Each unpaid interest coupon has to be dealt with separately for this purpose. If the transferee subsequently receives that interest in full, the relief so calculated should be set against it. If he receives payment in instalments, the relief should be set in sequence against the payments received until it is all used up. If the security is re-transferred before the interest has been received in full, any unused balance of the relief should be set against the AIS charge on the transfer. If the value of the interest on that transfer is less than the balance of unused relief, the excess relief is lost - it cannot be set against other interest receipts or other charges on transfer.