I bond - reporting accrued interest yearly rather than deferred

I have owned a large denomination paper I bond for about 20 years.  Most of the time I don’t pay much attention to it.  However, I have been very pleased over the last few years as it has been paying an excellent interest rate.  The interest has accrued over the years and now is of the order of about $20k.  Unfortunately as a UK resident I cannot open a Treasury Direct account  and so I can’t convert it into an electronic bond, which I could then sell off in small increments to minimise my tax burden.  By default I have been deferring any taxation on it.  This year I will have a low taxable income so I would like to minimise my tax burden on this interest.  I was thinking of switching over the method of reporting to one where I report the amount of interest every year.  I would have to declare all the accrued interest up to and including this year.  In the years going I would then have to declare just the annual interest from the bond.  I am UK resident and have dual citizenship. 

I have the following questions:

1) How do I figure the £ amount of interest over the past 20 years or so?  Do I have to calculate the amount accrued each month and then convert it?  (The treasury have a nice calculator but I am not liking the thought of 240 transactions).  Could I do it on an annual basis rather than monthly, or could I even make this decision on Dec 31st this year and convert all the accrued interest at that days exchange rate.?

2) I am assuming that HMRC will treat this income as standard interest.    Is this correct?

3) As far as timing is there anything I need to do as far as a) paying HMRC the tax owed in calendar year 2023, and b) being able to claim foreign tax credit when I submit my 2023 return in the US.  I am assuming that I would pay the estimated tax in 2023, file my UK tax in April 2024, and then my US taxes sometime after the UK tax has been accepted and approved.

I’m not sure you can do what you want to do. When you cash in your I-Bond you will get a 1099-INT showing how much interest was paid out. HMRC will treat it as regular interest income and will be taxable in the year received, using the exchange rate on the date it was paid.

I don’t see that you will be allowed to pay IRS or HMRC taxes ongoing on interest that is accruing but not paid out, or how you could apply foreign tax credits on income you haven’t received.

I may well be completely wrong on this of course as I am not a tax pro. My wife and I had Treasury Direct accounts and I-Bonds for many years but cashed them all in the year we moved back to England.

I have had some EE bonds for many years, but always paid US tax on the accrued interest, not deferred (election my parents made and I stuck with it to avoid complexities of changing). Obviously, that's allowed by the US.

But not clear how the UK treats it. I have chosen to treat it the same - some of them are starting to mature, and it doesn't seem right that I would pay all the UK tax on the full interest over 30 years, when I've paid US tax on that interest over the course of those 30 years. I don't know anywhere that's written down, though! I did get an HMRC letter a year or two ago asking about my overseas income and I explained this, along with other bits. Was very open with how I was treating it and basically asked them to tell me if I was doing it wrong. Never heard back, so I assume it's fine.

But that's a different situation from you, where you're electing to change the tax basis partway through. I really doubt you'll find clear-cut HMRC guidance (why would they publish guidance on an edge case of an edge case - not many UK taxpayers have US I or EE bonds to start with, and only a small number of them would change the treatment). Best suggestion would be to ask HMRC, or pay an expert. Probably cheaper and you'd get a clearer answer if you ask HMRC, but it may not be the answer you want!

Questions 2 and 3 are easier:

2: Yes, this is standard interest, taxable at your income tax rate.

3. If it's allowed, you might want to wait until 01Jan - 05Apr24 to make the change in the accounting (if that doesn't cause other issues). That way the "income" is in the 2023-24 UK tax year, you pay your UK taxes shortly after 05Apr, and then don't have to file US 2024 taxes until early 2025, at which point you've already paid the UK taxes and can easily claim the FTC.

Other option is to make the change between 06Apr23 - 31Dec23. That gives you a big chunk of "income" in the US 2023 tax year and UK 2023-24 tax year. Assuming you're doing the FTC on cash basis, not accrual (different decision...), you'd then need to file US taxes in early 2024 for 2023 and pay US tax, since there's no FTC yet (no UK tax paid). Then pay your UK taxes, pay a big chunk again, then amend your US taxes with an FTC carryback (allowed for 1 year, unless they ban it like Congress was considering) and wait for the IRS to issue a refund. Doable, just ugly. And the amendment is probably on paper, which means it takes ages.

Sorry for the rambling, it's a complicated question, and I don't know that I actually really answered it!

HMRC discuss in detail the UK tax issues here: https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim3070. I understand the DDS rules to be relevant here.

Thanks everyone for the responses. 

Durhamlad - The change in treating interest is definitely allowed in the US.  The Treasury Direct site states this explicitly.  of course in the US it would not be a problem for filing taxes as it would all count in the specific year I made the decision.  Apparently no paperwork is required to make this election but once you make the decision you can't reverse it. 

Guya - As far a deeply discounted security I am not sure that applies in this case.  The I bond was purchased at face value and can only be redeemed at face value plus accrued interest.  My understanding of DDS is that the bond is bought at a discount to face value.  Also I would not be selling the bond - just acknowledging the interest.

Tubaleiter - It does sound complicated - makes me think I should write to HMRC now and get their opinion.  Maybe the two thousand dollars I might save in tax might be taken up by tax adviser/preparer fees if I need to go that route.