At what point is interest taxable?

At what point is interest taxable?

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A Client who holds Guaranteed Loan Notes in a Company which is currently unable to pay the interest on these notes.
Under the terms, the interest will accrue and I understand will not be taxable until such time as it is actually paid to our client. In addition, the Company is liable to pay default interest. This default interest is due to accrue on the outstanding interest until the next interest payment date and at that point it will be capitalised and treated as an increase in the principal amount.
Am I right in thinking that this default interest will be treated as paid at the point at which it is capitalised and therefore our Client will be taxable on this default interest at that point?
This would seem to be the reasonable conclusion but I would be grateful for confirmation.

SP

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