The UK's Accrued Income Scheme (AIS) is an anti-avoidance provision intended to stop individuals and trustees from turning interest, taxable as income, into a capital gain and hence having to pay less tax on the sale and purchase of securities. The scheme is complicated and difficult to comply with, which has led to calls for it to be simplified. On 17 March 2004, the UK Government published a consultation document on possible ways to achieve simplification.

All the respondents agreed that the current scheme is too complex and needs reform. A number of those respondents highlighted the fact that interest rates and income tax rates are currently much lower than when the legislation was first introduced, nearly 20 years ago, and, as a result, the scope for tax avoidance has been greatly reduced.

It was not felt that simply raising the current £5,000 ($9,389) threshold for individuals would alleviate the complexities of the AIS. Suggestions for an increased threshold varied from £20,000 to £100,000. Most respondents supported the approach of taxing or relieving the difference between the clean and dirty price (the "clean" price is the value of the security less any accrued interest, whilst the "dirty" price is the value of the security plus any accrued interest), allied to an activity-based threshold for individuals, with the threshold being set in the range of £20,000 to £100,000.

All the respondents preferred any threshold to be based on nominal value of the securities rather than transfer proceeds, on the grounds of simplicity.

A number of alternative methods of reform were also suggested including
· securities being exempt if held for a defined period; and
· all securities being brought within the capital gains net.

The Inland Revenue’s response in relation to the first point was that such an exemption would arguably add to the complexities and allow wealthy individuals and large trusts to avoid income tax by recycling a proportion of their holdings at a frequency just exceeding the exemption period. As regards the second point, the Inland Revenue argued that bringing securities within the capital gains net would be a reversal of the aim of the AIS.

The Government decided to proceed with the reform in December 2004 and, following further consultation with the respondents, proposes to include the legislation in the 2006 Finance Bill.

This article is a general guide only and is not intended to be definitive advice which should be sought as appropriate in relation to a particular matter. If you would like to discuss a particular matter, please contact the authors.