Accrued income scheme
In this lesson, you'll learn how the accrued income scheme works and why it applies to interest-bearing assets like gilts. This is a key concept for Taxation (TX) and Advanced Taxation (ATX) papers, as it determines who pays income tax on accrued interest when bonds or gilts are sold during the tax year.
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In this lesson
- 0:00 Accrued income scheme explained
- 0:12 How the scheme works in practice
- 1:02 Why the scheme exists
- 1:36 Worked example: Maria's gilt sale
About this lesson
The accrued income scheme applies when an individual sells gilts with a nominal value above £5,000 during the tax year. The seller is taxed on all interest accrued up to the sale date, even if they haven't received it yet. The buyer then excludes that same accrued interest from their taxable income and only pays tax on interest earned from their purchase date onwards. This ensures income tax is paid on the interest rather than it being hidden in the sale price as a capital gain, which would be exempt. You'll work through a practical example with Maria's government bonds to see exactly how to calculate the taxable accrued interest. The worked example shows how to identify the accrual period, calculate the daily interest rate, and determine what portion of interest each party is taxed on. Understanding this scheme is essential for correctly handling investment income in your tax calculations and exam answers.
Duration: 3m
Transcript
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