[taxation on bonds in UK] quick question

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Topic Author
jg12345
Posts: 421
Joined: Fri Dec 11, 2020 12:03 pm

[taxation on bonds in UK] quick question

Post by jg12345 »

Hi all
I have a quick question on individual bonds.

Say I buy a single bond from, pick a country that is not UK and in EU, Spain.

OK. The bond is bought below par, say 95 EUR, face value 100 EUR, and has a coupon of 1% per year, paid annually, and matures in 2 years from now.

I buy a single bond today.

1) I get the coupons (1 EUR each coupon if I hold to maturity), and that is classed as interest, that is clear.
2) If I sell the bond before maturity, that is a capital gain. That is also clear
3) If I keep the bond until maturity, I make 100-95 x 1 = 5 EUR. That is also a capital gain, is that correct?

I get confused because looking on the web there is a lot of pages describing surrender values and call bonds financial instruments that I am not sure are bonds. There's also lots of info on Gilts, but less on offshore bonds.

Thanks a lot in advance!
Best
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: [taxation on bonds in UK] quick question

Post by Valuethinker »

jg12345 wrote: Thu Oct 06, 2022 11:15 am Hi all
I have a quick question on individual bonds.

Say I buy a single bond from, pick a country that is not UK and in EU, Spain.

OK. The bond is bought below par, say 95 EUR, face value 100 EUR, and has a coupon of 1% per year, paid annually, and matures in 2 years from now.

I buy a single bond today.

1) I get the coupons (1 EUR each coupon if I hold to maturity), and that is classed as interest, that is clear.
2) If I sell the bond before maturity, that is a capital gain. That is also clear
3) If I keep the bond until maturity, I make 100-95 x 1 = 5 EUR. That is also a capital gain, is that correct?

I get confused because looking on the web there is a lot of pages describing surrender values and call bonds financial instruments that I am not sure are bonds. There's also lots of info on Gilts, but less on offshore bonds.

Thanks a lot in advance!
Best
Gilts you don't pay tax on the change in capital value I don't think.

https://www.dmo.gov.uk/responsibilities ... /taxation/

I remember Ted Swippet had a post about it in the last few months.

However you do pay tax on capital gains on corporate bonds. Not sure about international bonds.

https://s3-eu-west-1.amazonaws.com/eumu ... xation.pdf
Income from Corporate Bonds is generally treated as interest income and
is paid free of UK tax. Where the bond is issued by a non-UK issuer
income maybe subject to foreign withholding tax. In addition there
maybe UK tax to pay, depending on your personal circumstances. Where
the corporate bond is a Qualifying Corporate Bond no capital gains tax
would be payable on disposal, in other cases gains maybe subject to
capital gains tax.
https://citywire.com/funds-insider/news ... ke/a614188

links you to an HMRC page re "Qualifying Corporate Bond". Which is now a dead link. I think you have to read the Prospectus to see if there is any information on whether it counts as a QCB?

Note it warns you that *corporate* index-linked bonds in the UK do not qualify for the relief from tax. The uplift in principal due to inflation is taxed as income.

My guess is foreign bonds are not qualifying, so you would pay CGT.

Confusingly there is a life insurance product called "an Investment Bond" and that makes searching for this stuff online difficult. That's what "Surrender Value" is about.
Topic Author
jg12345
Posts: 421
Joined: Fri Dec 11, 2020 12:03 pm

Re: [taxation on bonds in UK] quick question

Post by jg12345 »

Valuethinker wrote: Thu Oct 06, 2022 12:11 pm
jg12345 wrote: Thu Oct 06, 2022 11:15 am Hi all
I have a quick question on individual bonds.

Say I buy a single bond from, pick a country that is not UK and in EU, Spain.

OK. The bond is bought below par, say 95 EUR, face value 100 EUR, and has a coupon of 1% per year, paid annually, and matures in 2 years from now.

I buy a single bond today.

1) I get the coupons (1 EUR each coupon if I hold to maturity), and that is classed as interest, that is clear.
2) If I sell the bond before maturity, that is a capital gain. That is also clear
3) If I keep the bond until maturity, I make 100-95 x 1 = 5 EUR. That is also a capital gain, is that correct?

I get confused because looking on the web there is a lot of pages describing surrender values and call bonds financial instruments that I am not sure are bonds. There's also lots of info on Gilts, but less on offshore bonds.

Thanks a lot in advance!
Best
Gilts you don't pay tax on the change in capital value I don't think.

https://www.dmo.gov.uk/responsibilities ... /taxation/

I remember Ted Swippet had a post about it in the last few months.

However you do pay tax on capital gains on corporate bonds. Not sure about international bonds.

https://s3-eu-west-1.amazonaws.com/eumu ... xation.pdf
Income from Corporate Bonds is generally treated as interest income and
is paid free of UK tax. Where the bond is issued by a non-UK issuer
income maybe subject to foreign withholding tax. In addition there
maybe UK tax to pay, depending on your personal circumstances. Where
the corporate bond is a Qualifying Corporate Bond no capital gains tax
would be payable on disposal, in other cases gains maybe subject to
capital gains tax.
https://citywire.com/funds-insider/news ... ke/a614188

links you to an HMRC page re "Qualifying Corporate Bond". Which is now a dead link. I think you have to read the Prospectus to see if there is any information on whether it counts as a QCB?

Note it warns you that *corporate* index-linked bonds in the UK do not qualify for the relief from tax. The uplift in principal due to inflation is taxed as income.

My guess is foreign bonds are not qualifying, so you would pay CGT.

Confusingly there is a life insurance product called "an Investment Bond" and that makes searching for this stuff online difficult. That's what "Surrender Value" is about.
Thanks. Yes, that's where the confusion is: the "investment bond" life insurance product made my search pretty difficult.

Yes, my understanding is that only non-indexed gilts are exempt from CGT.

I am still not clear about how a capital gain resulting from maturity of the bond is taxed. I would have guessed it is capital gain, but I saw that zero-coupon bonds are not treated as bonds by HMRC depending on annual return, but they are "deeply discounted securities", and that any profit, including from the sale of a zero-coupon bond, is treated as interest/income and not a capital gain.

Can someone clarify that:
- profit from the difference between purchase cost (say 98) and redemption value (gained by holding to maturity, say 100) of a standard, plain vanilla bond is taxed as a capital gain

and

- profit from the difference between purchase price (say 92) and redemption value (gained by holding to maturity, say 100) of a zero-coupon bond which qualifies as "deeply discounted security" is taxed as income. But if the zero coupon bond does not qualify as "deeply discounted security" (issue price is below maturity value by at least 0.5% per year) then it is taxed as capital gain.

I looked for Ted Swippet post and could not find it unfortunately :(
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: [taxation on bonds in UK] quick question

Post by Valuethinker »

jg12345 wrote: Sat Oct 08, 2022 4:13 am
Valuethinker wrote: Thu Oct 06, 2022 12:11 pm
jg12345 wrote: Thu Oct 06, 2022 11:15 am Hi all
I have a quick question on individual bonds.

Say I buy a single bond from, pick a country that is not UK and in EU, Spain.

OK. The bond is bought below par, say 95 EUR, face value 100 EUR, and has a coupon of 1% per year, paid annually, and matures in 2 years from now.

I buy a single bond today.

1) I get the coupons (1 EUR each coupon if I hold to maturity), and that is classed as interest, that is clear.
2) If I sell the bond before maturity, that is a capital gain. That is also clear
3) If I keep the bond until maturity, I make 100-95 x 1 = 5 EUR. That is also a capital gain, is that correct?

I get confused because looking on the web there is a lot of pages describing surrender values and call bonds financial instruments that I am not sure are bonds. There's also lots of info on Gilts, but less on offshore bonds.

Thanks a lot in advance!
Best
Gilts you don't pay tax on the change in capital value I don't think.

https://www.dmo.gov.uk/responsibilities ... /taxation/

I remember Ted Swippet had a post about it in the last few months.

However you do pay tax on capital gains on corporate bonds. Not sure about international bonds.

https://s3-eu-west-1.amazonaws.com/eumu ... xation.pdf
Income from Corporate Bonds is generally treated as interest income and
is paid free of UK tax. Where the bond is issued by a non-UK issuer
income maybe subject to foreign withholding tax. In addition there
maybe UK tax to pay, depending on your personal circumstances. Where
the corporate bond is a Qualifying Corporate Bond no capital gains tax
would be payable on disposal, in other cases gains maybe subject to
capital gains tax.
https://citywire.com/funds-insider/news ... ke/a614188

links you to an HMRC page re "Qualifying Corporate Bond". Which is now a dead link. I think you have to read the Prospectus to see if there is any information on whether it counts as a QCB?

Note it warns you that *corporate* index-linked bonds in the UK do not qualify for the relief from tax. The uplift in principal due to inflation is taxed as income.

My guess is foreign bonds are not qualifying, so you would pay CGT.

Confusingly there is a life insurance product called "an Investment Bond" and that makes searching for this stuff online difficult. That's what "Surrender Value" is about.
Thanks. Yes, that's where the confusion is: the "investment bond" life insurance product made my search pretty difficult.

Yes, my understanding is that only non-indexed gilts are exempt from CGT.
Indexed linked gilts are not subject to CGT. Inflation indexed corporate bonds are.

https://www.gov.uk/guidance/gilt-edged- ... -gains-tax lists the UK govt issues which are CGT exempt. Includes some index linked gilts.
I am still not clear about how a capital gain resulting from maturity of the bond is taxed. I would have guessed it is capital gain, but I saw that zero-coupon bonds are not treated as bonds by HMRC depending on annual return, but they are "deeply discounted securities", and that any profit, including from the sale of a zero-coupon bond, is treated as interest/income and not a capital gain.

Can someone clarify that:
- profit from the difference between purchase cost (say 98) and redemption value (gained by holding to maturity, say 100) of a standard, plain vanilla bond is taxed as a capital gain
Only if it is a QCB.
and

- profit from the difference between purchase price (say 92) and redemption value (gained by holding to maturity, say 100) of a zero-coupon bond which qualifies as "deeply discounted security" is taxed as income. But if the zero coupon bond does not qualify as "deeply discounted security" (issue price is below maturity value by at least 0.5% per year) then it is taxed as capital gain.

I looked for Ted Swippet post and could not find it unfortunately :(
Not sure re 0 Coupon bonds. You've stated the HMRC rules there?
Topic Author
jg12345
Posts: 421
Joined: Fri Dec 11, 2020 12:03 pm

Re: [taxation on bonds in UK] quick question

Post by jg12345 »

Valuethinker wrote: Wed Oct 12, 2022 4:25 am Only if it is a QCB.
I see! so even profit from a non-QCB reaching maturity is taxed as income.

and profit from a non-QCB sale is taxed as income, I presume. so either one gets QCBs, and then you have usual income from interests, capital gains on sale at higher price than purchase price, or for non-QCBs everything goes to income.

Valuethinker wrote: Wed Oct 12, 2022 4:25 am Not sure re 0 Coupon bonds. You've stated the HMRC rules there?
Yes, HMRC rules about deeply discounted securities as far as I understood them from here:

https://www.gov.uk/hmrc-internal-manual ... l/saim3020
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