Inland Revenue 27
17 March 1998
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TAXATION OF GILTS AND THE ACCRUED INCOME SCHEME
Measures to help make the UK gilt market more attractive to
overseas investors were announced today. The package will
also simplify the way accrued interest is taxed for certain
UK taxpayers.
From 6 April, FOTRA (Free Of Tax to Residents Abroad) status -
which currently only applies to some gilts - will be extended
to all non-FOTRA gilts. At the same time, existing basic
rate charges under the Accrued Income Scheme will be reduced
to the lower rate of tax.
Further measures to rationalise outdated provisions concerning
exchanges of gilts (in connection with nationalisations and
gilt conversion offers) will take effect from Royal Assent.
DETAILS
Extension of FOTRA status
1. Gilts issued on FOTRA (Free of Tax to Residents Abroad)
terms, and the interest on them, are generally exempt from UK
tax if they are held by persons who are not ordinarily
resident in the UK. The precise terms (there are three
versions) depend on the prospectus under which the gilt is
issued. The most recent version - for gilts issued after
the 1996 Finance Act - confirms that all income from FOTRA
gilts is exempt from tax if the holder is non-resident,
unless that income is received as part of a trade conducted in
the UK.
2. In relation to interest income, FOTRA status means that
overseas investors can reclaim any tax deducted from their
interest. Although all investors will be able to receive
interest gross from 6 April 1998 regardless of where they are
resident for tax purposes as a result of the changes
announced last summer (see INLAND REVENUE notice of 2 July
1997), the question of whether a gilt is FOTRA or not is
still significant. This is because, in principle, the FOTRA
guarantee takes precedence over other tax provisions, so the
exemption from tax provided under FOTRA is more valuable to
an overseas investor, because it is more certain. In
addition, an overseas investor who inadvertently receives
interest on FOTRA gilts under deduction of tax can reclaim
it, even if the double tax treaty with their home country
provides no mechanism for this.
3. The extension of FOTRA status from 6 April 1998 means
that all existing non-FOTRA gilts will now be deemed to be
FOTRA gilts on the 1996 Finance Act terms. For the reasons
given above, this will help make the gilt market more
attractive to overseas investors. It will also simplify the
market as these distinctions between different gilts will no
longer exist. For practical purposes, however, the impact
will only be modest since 70 per cent of gilts (by nominal
value) are now FOTRA and nearly all recently issued gilts have
been FOTRA.
4. The change will not, by itself, trigger any tax charge.
In the one case (discretionary trusts set up by UK domiciled
persons for beneficiaries not resident in the UK) where the
change could have given rise to an inheritance tax charge
under present rules, a small amendment has been made to ensure
there is none.
Simplification of charges in the Accrued Income Scheme
5. The Accrued Income Scheme acts to ensure that, when an
interest bearing security is transferred, both buyer and
seller are effectively taxed only on the proportion of
interest relating to their period of ownership. The scheme
works by identifying the relevant taxable amount (equivalent
to the interest) and apportioning this between the seller and
buyer via a system of charges and reliefs.
6. For basic rate taxpayers, the charge is set at the basic
rate (23 per cent for 1997-8), but depending on
circumstances, the rate of relief may be either the basic
rate or the rate attributable to interest (20 per cent ).
This is because if the security is resold immediately, the
relief on purchase is set off against the new charge on the
sale (an effective rate of 23 per cent). But if the relief
is set against the amount of interest received, the net amount
is taxed at 20 per cent.
7. This anomaly is now being removed, so that for basic and
lower rate taxpayers, charges will be made and relief given
at the same rate as interest. As now, higher rate taxpayers
and trustees will continue to be chargeable at the higher
rate, or at the rate applicable to trusts as appropriate.
8. The change takes effect from 6 April and the new rule
will apply for the whole of the 1998- tax year. It will
affect all securities to which the AIS applies - not just
gilts.
Further measures to rationalise the taxation of gilts
9. The Taxes Acts contain some longstanding provisions
concerning the taxation of gilts in connection with
nationalisations and gilts conversions. They provide for the
deferral of profits and losses arising in these very specific
circumstances for certain financial traders. Following the
introduction of the 1996 loan relationships legislation these
separate provisions are no longer needed. The scope of a
related provision, which deals with exchanges of securities
held as working capital, is being clarified at the same time,
in order to confirm explicitly that it now only applies to
exchanges of shares for shares.
NOTES FOR EDITORS
1. The Bank of England is issuing a brief screen
announcement on the FOTRA change today.
2. The amendment required in the case of discretionary
trusts set up by UK domiciled persons for beneficiaries who
are not ordinarily resident in the UK is to prevent the
extension of FOTRA status to non-FOTRA gilts triggering an
inheritance tax charge. Currently FOTRA gilts held in such
trusts count as excluded property and are not subject to
certain inheritance tax charges. If assets which are not
excluded property, such as non- FOTRA gilts, are exchanged for
excluded assets or turn into excluded assets, under existing
rules there could be an exit charge. The amendment ensures
that no exit charge is triggered simply by non-FOTRA gilts
becoming FOTRA gilts.
3. The cost of all the above changes will be negligible.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6692/6706/7327
(Out of hours 0860 359544)
Non media enquiries to: 0171 438 6420/6425
(Office hours only)