Index linked gilt - rebate interest

TheGreenFrog

I bought a short dated index-linked gilt (TR24) recently, as an experiment to see how it performs versus a similar dated conventional gilt (TN24).  I bought on the ex div date.  The contract note specified 000 interest days and I raised a query with the broker as to what had happened to the rebate interest element.  After one incorrect response (that I had bought on coupon date) I got a rather confusing reply saying that the contract note was wrong and that I would be credited with 174 days interest on the coupon date.  I presume they mean that I will be paid (by whom I do not know) the rebate interest (seven days by my reckoning) on the coupon date.  Does anyone know what should be happening (or what normally happens) - I don't know and evidently the broker doesn't either!?

masonic

If you bought on the ex-dividend date, then you would not need to pay anything for the accumulated interest distribution because you won't be entitled to it. Seems to me that the contract note is correct. For any financial instrument, if you buy when it is trading ex-dividend, the price you pay reflects the fact you won't get the next dividend. This is why things drop in price on their XD date.

Delburn

If you bought on 13/3/23, Tradeweb (registration required: https://reports.tradeweb.com/closing-prices/gilts/ ) suggests you should have received rebate interest of -0.004106 per 100 nominal, deducted from the cost of the purchase transaction.

It might also have been that the rebate was buried in the purchase price depending on how this is shown in the contract note.  You may be able to check this using dirty price = clean price * index ratio + accrued interest = clean price * 1.48651 - 0.004106.

The accrued interest Tradeweb quotes can be reconciled as -0.004106 = 100 * 0.00125 * - 8 / 181 / 2 * 1.48651 where 1.48651 is the index ratio on 14/3/2023 and can be derived from the RPI index and base RPI for this gilt.

This assumes T+1 settlement, the numbers will be slightly different if it was T+2.

masonic

In case of any confusion about the rebate interest, see https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim4020

"Under the AIS, the interest which will accrue from the date of sale to the next interest payment date (the ‘rebate interest’) is charged to income tax on the purchaser (whose purchase price will have been reduced to take account of it), and the vendor is given relief for the same amount normally against the interest payment when he or she receives it."

It is not a sum of money that will be paid to you.

TheGreenFrog

masonic said:

It is not a sum of money that will be paid to you.

That was my understanding (i.e. the rebate is factored into the dirty price and is taxable under the AIS).  According to the broker my trade was not done on that basis.  I have raised a formal complaint as the basis for the trade is unclear and they have been unable to give a coherent response.

GeoffTF

iWeb shows the accrued interest as a separate item added to the purchase price for my purchases of T29. iWeb's accrued interest tallies (as near as makes no difference) with the number of units x Tradeweb's accrued interest per unit / 100. I have always subtracted the accrued interest given by iWeb from the interest that I receive. Here is the HMRC help sheet:

https://www.gov.uk/government/publications/accrued-income-scheme-hs343-self-assessment-helpsheet/hs343-accrued-income-scheme-2019

If you buy a security with accrued interest, the next interest payment that you receive will be taxable. But, because you’ve already paid an extra amount to buy the security, you can get tax relief under the Accrued Income Scheme. The extra amount you’ve paid is an ‘accrued income loss’. You deduct this from the interest that you get.

masonic

GeoffTF said:

iWeb shows the accrued interest as a separate item added to the purchase price for my purchases of T29. iWeb's accrued interest tallies (as near as makes no difference) with the number of units x Tradeweb's accrued interest per unit / 100. I have always subtracted the accrued interest given by iWeb from the interest that I receive. Here is the HMRC help sheet:

https://www.gov.uk/government/publications/accrued-income-scheme-hs343-self-assessment-helpsheet/hs343-accrued-income-scheme-2019

If you buy a security with accrued interest, the next interest payment that you receive will be taxable. But, because you’ve already paid an extra amount to buy the security, you can get tax relief under the Accrued Income Scheme. The extra amount you’ve paid is an ‘accrued income loss’. You deduct this from the interest that you get.

This situation is different, there is no accrued interest as the security was traded during the ex-dividend period. The buyer of the security is treated as having the benefit of the interest during the XD period, but does not actually receive it. The market sets the price of the security accordingly and you cannot get tax relief on this 'rebate interest' that you receive as a capital gain rather than income. It is the seller of the security that receives the tax relief. From the SAIM4020 link I quoted above:

"Consequently the market price of a security sold ‘ex div’ reflects the fact that the purchaser will own the security for a short period from the date of purchase to the next interest payment date. This is a period over which interest accrues but for which the interest is received not by him but by the seller. The interest accrued over such a period is known as rebate interest. It is treated in the opposite way to the more normal accrued interest associated with a ‘!!!!!! div’ sale."

The broker seems to have tied themselves in knots trying to explain the situation, and for that a complaint is justified, but unless the consolidated tax voucher is seen not to include the taxable rebate interest, it cannot be established that anything was wrong with this trade. The contract note itself is correct, in that there is an entitlement to 0 interest days at purchase.

GeoffTF

Long ago, one of the brokers that I used did not provide the accrued interest on the contract note. It was bundled into the price. No problem. I worked it out from the number given on the DMO website (Tradeweb is now the official source.) I have already described how to calculate the accrued interest (which will be negative in the OP's case) from the number given by Tradeweb. I have had negative accrued interest in the past. Again, no problem. I subtracted the negative number from the interest (i.e. I added the absolute amount to the interest). Hopefully, we have given the OP enough information to fill in his tax return.

The OP has not said which broker he is using. Nonetheless, it is not realistic to expect the customer service personnel manning the telephones to understand and explain all of this, but the traders should get it right. Full service brokers should do better than that, but you will have to pay for it.

masonic

GeoffTF said:

Nonetheless, it is not realistic to expect the customer service personnel manning the telephones to understand and explain all of this, but the traders should get it right.

That's fair, although guessing and getting it wrong does fall short of what should be expected in my view, such a query should be passed on to someone capable of giving an accurate answer, or they should wheel out the 'unable to give you individual advice related to tax' line.

GeoffTF

masonic said:

GeoffTF said:

Nonetheless, it is not realistic to expect the customer service personnel manning the telephones to understand and explain all of this, but the traders should get it right.

That's fair, although guessing and getting it wrong does fall short of what should be expected in my view, such a query should be passed on to someone capable of giving an accurate answer, or they should wheel out the 'unable to give you individual advice related to tax' line.

That is also fair enough. The best approach is to do your homework, expect that everything will go wrong, and be polite and patient when it does.

What matters here is getting a good overall price, and staying in HMRC's good books. The tax on a few pounds of accrued interest probably is not going to affect the bottom line very much, but you do need to get it right on your tax return.

GeoffTF

I have looked at my contract notes and compared them with the notes that I made when talking to the dealer. iWeb calculates the price as the number of units x dirty price + accrued interest + commission. For conventional gilts, the accrued interest is included in the dirty price. This link suggests that the same is true for 3-month lag index linked gilts, but their example is clearly wrong, because it does not take account of indexation:

https://docs.londonstockexchange.com/sites/default/files/documents/accrued-interest-gilts.pdf

I cannot find a definitive reference. I bought with a fixed amount of money. The dealer has chosen the number of units to buy so that the number of units x dirty price + accrued interest + commission = the fixed amount of money. The dealer's calculation is therefore consistent with the contract note.