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The accrued income scheme was originally introduced as an anti-avoidance measure in 1985 to bring what would otherwise be a capital gain within the scope of income tax. ‘Bond-washing’ was a practice whereby holders of securities (such as gilts or corporate bonds) would dispose of their stocks immediately prior to the date on which interest became payable. The price obtained for the security included the interest accrued on the stock, but the profit on the security was taxed under the capital gains rules rather than being treated as income.

The accrued income scheme calculates the accrued interest every time stock is transferred and allocates this proportion of the proceeds as ‘interest’ for income tax purposes. The interest is either an income tax ‘profit’ or an income tax ‘loss’ for the transferor (seller) or the transferee (buyer) depending on whether the stock is sold with or without the right to the next interest payment.

Accrued interest is savings income for the purposes of the income tax calculation and so the savings income tax rates apply, including the starting