As I know from my direct personal experience as an investor my index-linked gilts are only taxed on the interest. HMRC accept this unequivocally and the type of loan in the OP is absolutely on all fours with such gilts. Not to concede that is rank hypocrisy and intellectual dishonesty on their part but I understand that they do indeed maintain the position. As ever there has been ample opportunity for them to change the law but they choose instead to tax by proclamation.
They have so far managed, again as ever, to exploit the understandable reluctance of trustees to be forced into the appeal system with all its attendant hazards. There has been no decided case as far as I know.
A guide to the technical weakness of their view is the fact that they obtained legislation to tax deep discount securities partly as income, plus the “Accursed” Income Scheme, a tacit admission that otherwise the capital uplift would escape income tax just like the indexation element when the gilts above are sold or redeemed.
See TSEM3200 for the myriad items of capital already specifically treated as taxable income precisely because otherwise they would not be on general principles. See also the practice on “disguised interest” in SAIM2700 e.g.2730: index-linking of capital has nothing to do with the time value of money but rather with the erosion of the value of the loan principal through inflation.
The entire regime of Loan Relationships for corporate taxpayers is designed to dispense with the capital/income distinction by taxing debits and credits, those mysterious artifacts of the arcane science of GAAP.
The ineluctable corollary is that trustees are surely entitled to treat the index-linked element as income for all tax purposes so, as you say, for RPT ITH charges. Tax payable on it will go into the pool of a relevant trust. HMRC must accept that this logically follows: they cannot blow hot and cold as it suits them save by intimidation via threats of endless “punk“ litigation, totally without merit, backed by a very deep pocket.
Jack Harper