Tax and your investments

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7. Interest on Treasury Stock

One complication with Treasury Stock, also known as gilts, is that interest is normally paid every six months, and if the stock is sold at some point between the interest payment dates, a decision has to be made about who is going to get the next interest payment - the seller or the buyer. The usual practice is:

• If the stock is sold before the end of month four, it is sold "cum interest", meaning that the buyer receives the next interest payment.
• If the stock is sold after month four, it is sold "ex interest", meaning the seller receives the next interest payment.

The price of the gilt is adjusted at the time of the sale according to who is getting the accrued interest. From a tax point of view, both seller and buyer have to make adjustments to reflect the income they are really getting.

Example

Suppose you buy £20,000 of 5% Treasury Stock 2020 on 1st January and hold it for 59 days then sell it to Mr Smith "cum interest" so that he gets the £500 interest on 1st July.

• You are assessed for income of 59/183 x £500 = £161.20. Even though you didn't receive this amount it is assumed that £161.20 was reflected in the sale price.
• Mr Smith actually received £500 interest, but the Revenue allows him to deduct £161 "rebate interest", so that he is actually assessed on £339.

Note that the critical part of this is the assumption that the sale price reflects where the next interest payment is going.

For CGT purposes, the cost and proceeds of Treasury Stock purchases and sales are calculated by taking out the interest either bought or sold from the purchase or sale price respectively.

1. Keeping it legal 2. How HMRC treats your investment income 3. Keeping records 4. The basis of dividend income 5. Dividend income 6. Interest income 7. Interest on Treasury Stock 8. Capital gains tax basics 9. Base cost 10. Indexation 11. Taper relief 12. Indexation and taper relief - together! 13. Date of acquisition 14. Disposal proceeds 15. Disposal of a holding with a history 16. Takeovers 17. Bonus/scrip issues 18. Share splits 19. Buybacks 20. Rights issues 21. Share options 22. Beneficiaries and minors 23. Calculating your CGT liability 24. Using your annual CGT exemption 25. Transfers between spouses 26. ISAs 27. Delaying capital gains 28. Other tips to reduce CGT liability 29. Conclusion