CFM37140 - Loan relationships: special types of security: gilt-edged securities: taxing indexed gilts: example
Making the adjustment: example
In this simplified example, the only change in the value of the gilt relates to the RPI.
Jarrah Ltd subscribes 拢30,000 for 2.5% index-linked gilts on their issue on 1 July. The nominal value of the gilts is 拢30,000. Interest is payable 6 monthly on 30 June and 31 December. Accounts are drawn up to 31 December using the amortised cost basis.
RPI is 150 on 1 July, 153 on 31 December which gives a 2% change in RPI ((153 - 150)/150 x 100).
Accounts
The company accrues interest on the gilt in the normal way. 拢30,000 x 2.5% x 6/12 = 拢375.
RPI increases by 2% between July and the company鈥檚 accounting date at 31 December.
The company applies this increase to the issue price of the gilt to determine its balance sheet value. 拢30,000 x 2% = 拢600, so the gilt will be shown at 拢30,600 in the accounts.
The company accrues a total of 拢975 in the accounting period (拢600 for the indexed rise and 拢375 for the interest).
Tax adjustments
S399 requires that the amount relating to RPI is excluded from the taxable credits. This is achieved by increasing the opening fair value of the gilt by the increase in RPI. The opening fair value of 拢30,000 is increased by the indexed rise of 拢600. The closing fair value is 拢30,600, so the only amount taken into account for tax purposes is interest of 拢375.