What is accrued interest?

I hope someone can advise me about my mother's income tax self assessment for 08-09 where one of her financial statements has an entry for on UK Government stock. One figure is a gross interest, fair enough. Then
another entry shows "Accrued Interest Paid" which is a negative number.
Is there an explanation for this negative interest and how is it entered on the SA return?
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Pliers wrote:

In general terms "accrued interest" means interest which has been, so to speak, "earned", but which has not yet been paid. For instance you accrue interest on a bank deposit account continuously, or daily, but it isn't normally credited to the account daily, but just quietly clocks up somewhere in the background, and is credited only on certain days, typically monthly, quarterly, or yearly.
So if "accrued interest" is interest *not paid*, the term "accrued interest paid" is strictly speaking an oxymoron (a self-contradiction). I'm not familiar with government stock management practice, but would imagine your mother's holding is wrapped in some kind of notional account into which interest accrues continuously, or perhaps even incrementally (that'll be the figure for "gross interest"). In that case the "accrued interest paid", especially if it's a negative number, almost certainly represents a transfer into some other account, probably her usual current account, and so you should be able to track it down there. For income tax purposes, you should disregard both this negative figure and the corresponding positive figure in the current account, and just enter the original "gross interest" as earned.
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I don't think it's as simple as that.
The OP needs to get an explanation of the statement from the preparer.
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PeterSaxton wrote:

Do you think there's something unusual going on?
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wrote:

Yes. Why is accrued interest paid a negative number but there's no accrued interest as a positive number?
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PeterSaxton wrote:

But there was. The OP wrote "One figure is a gross interest ... Then another entry shows ...".
However, the explanation meanwhile offered by Roger Morton seems highly plausible, i.e. that, following the usual periodic crediting of interest, the portion of the interest which had accrued before the stock was purchased was deducted and remitted to the previous holder, and that therefore only the difference should count as the current holder's income for tax purposes.
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wrote:

r.

I wasn't thinking that it had been purchased during the year.
The other entry was accrued it was paid.
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wrote:

It doesn't work like that; the issuer of the stock always pays the whole interest amount to whoever is recognised as the holder on the record date. There's no concept of part-period payments being remitted at the end of the period - they flow through the market at the time of each trade, and the issuer remains blissfully unaaware of them.
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Was the stock purchased during that tax year? If so, your mother would have had to pay the seller for the interest that the stock had earned since the previous interest payment date (6-monthly for most gilts); then on the next interest payment date, your mother receives a full 6 months worth of interest, but for tax purposes can then set off the cost of the accrued interest paid out on purchase.
http://www.hmrc.gov.uk/guidance/ais.htm
might help
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Roger Morton
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Yes. The stock was bought on 9/5/08. The gross distribution was made on 7/9/08 so the previous distribution would have been on 7/3/08.

So it suggests the amount to declare is distribution minus accrued.
Very helpful, thanks. Much more so than the issuer of the tax certificate managed. Hopefully they will be more forthcoming to second time of asking.
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Right - the contract note (if you have it) for the purchase on 9/5/08 should therefore show the cost of about 68 days of accrued interest (from 7/3/08 to whatever the settlement date for the purchase was), and that figure should be consistent with the number you've been given in the financial statements.

Yes - but beware, as David Woolley points out, that can imply you have to hold over an accrued interest cost incurred in one tax year, if the next interest payment date doesn't crop up until the next tax year. Doesn't apply in your current case, though.

I really wouldn't hold my breath on that one - in my experience they expect their clients to have perfect knowledge :-)
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Roger Morton wrote:

At least the last time I had non-zero accrued interest, the accrued interest could actually end up applying to the tax year following the transaction, dependent on the real interest payment date.
Also, accrued interest is always gross.
There may be special rules for overseas securities.
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