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How bonds and bond funds are taxed

How bonds and bond funds are taxed post image

Okay, there’s no way to sugar this: I’m writing about tax on bonds, so I’ll keep it short, if not sweet.

Bond taxation is confusing and life is fleeting so, double-quick, here’s what you need to know to keep on the right side of the taxman:

  • Bonds are not taxed the same as equities.
  • Bond funds are not taxed the same as individual bonds.
  • Offshore bond funds are not taxed the same as onshore ones. (In other words, the treatment may be different if your bond fund sits outside the UK.)
  • Exchange-Traded Funds (ETFs) are not taxed the same as bond funds.

The following two tables sum up the income tax and capital gains tax treatments and differences between the main types of bond vehicle.

Further explanation lies beneath.

Tax treatment of interest

Bond fund
(OEIC, Unit Trust)
Bond
ETF
Individual
gilt
Individual
bond
Tax on interest Income tax rate
(e.g. 20%)
Income tax rate Income tax rate Income tax rate
Interest paid gross or net of tax Net of 20% tax Gross Gross Gross
ISA / SIPP shelter Exempt (reclaim 20%
tax withheld)
Exempt Exempt Exempt

Source: HMRC and fund providers.

Tax treatment of capital gains

Bond fund
(OEIC, Unit Trust)
Bond
ETF
Individual
gilt
Individual
bond
Capital gains tax (CGT) Payable Payable Exempt Payable unless a qualifying corporate bond
Non-reporting fund (offshore) CGT payable at income tax rate CGT payable at income tax rate n/a n/a
ISA / SIPP shelter Exempt Exempt Exempt Exempt

Source: HMRC and fund providers.

That’s the bond and bond fund tax sitch in a nutshell.

Now let’s look at the details.

Where should you stash your bonds and bond funds?

If your fund is more than 60% invested in fixed interest and cash at any point during its accounting year then its distributions count as interest payments – not as dividends.

Distributions / excess reportable income will therefore be liable for income tax at your standard rate, rather than softie dividend tax rates.

If your interest is paid gross then you’ll need to pay income tax on it, unless it’s tucked inside your ISA / SIPP or you’re a non taxpayer.

Bond funds registered as OEICs or Unit Trusts pay interest with 20% tax already deducted.

  • So a basic rate taxpayer has no more to pay. (Yay!)
  • A higher rate taxpayer owes another 20%.
  • A non-taxpayer is due 20% back.

If your bond fund is safely dunked inside an ISA or SIPP then you should automatically receive interest payments gross, but it’s worth a double-check email to your provider.

Non-reporting bond funds may pay interest gross. More on non-reporting funds below.

To hold an individual bond in your ISA or SIPP it must be listed on the stock exchange or issued by a listed company. (You can now keep short-term bonds in your ISA – the old five-year lifespan rule has been scrapped.)

Individual gilts are immune from capital gains.

Gilt funds must pay capital gains.

If an offshore fund / ETF does not have UK reporting status then capital gains are payable at income tax rates. That’s bad news as capital gains tax rates are much friendlier than income tax. The £11,000 tax-free capital gains allowance would count for nought in this instance while higher rate taxpayers would pay tax on their capital gains at 40% instead of 28%.

Just make sure your offshore bond tracker says it’s a reporting fund on its factsheet. HMRC also publish a list of reporting funds.

Offshore bond funds / ETFs are subject to withholding tax just like equity funds.

If your bond fund is domiciled in the UK then reporting status and withholding tax isn’t an issue.

Index-linked Gilt ETF vs Index-linked Gilt Fund taxation

Some UK-based index-linked gilt funds are exempt from income tax on the inflationary component of interest payments.

In other words, if inflation shot up 5% in a year and the gilt paid 1% interest on top of that, then you’d only pay income tax on the 1% and not the other 5%.

However, offshore index-linked gilt ETFs will generally impose income tax on the whole interest payment (including the inflation-based element) because they do not enjoy the same exemption as an onshore fund.

So if you’re stocking up with index-linked gilts then look for a tracker fund that’s based in the UK. (Email the provider to make sure they’re packing a tax exemption on inflation-linked interest.)

Take it steady,

The Accumulator

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{ 51 comments… add one }
  • 1 FIbrarian September 17, 2015, 9:57 am

    Thanks for the run-down Accumulator. It’s easy to forget the myriad of different things someone could be referring to when they talk about “a bond” and I hadn’t realised they were taxed differently. Is there ever a reason you wouldn’t hold these in an ISA if you could?

  • 2 rugbytrader September 17, 2015, 12:04 pm

    I take it with bond focused Investment Trusts that you just treat these as standard equities for tax purposes?

  • 3 Topman September 17, 2015, 1:13 pm

    @rugbytrader – “….. treat these as standard equities …..”

    Nope! Read and inwardly digest
    http://monevator.com/tax-efficient-investing-uk-order-isa-sipp/

  • 4 jon S September 17, 2015, 1:37 pm

    The issue of ITs that invest in bonds is a further complication, not covered by either of these excellent articles. As is the onshore vs offshore IT status. So heres my tuppence worth, based on real invesments, lots of research and tax returns prepared by my accountant and agreed by HMRC. I simplify – Onshore ITs investing in bonds should pay dividends, rather than interest and this will incur the dividend tax of 7.5% (will they be paid gross or net, who knows?) rather than the 20% interest tax paid on OEIC type bond funds for basic rate tax payers. So it seems for collective bond instruments ITs are more tax efficient than OEICS. Offshore ITs investing in bonds eg NCYF and HDIV (which I own) pay dividends that are gross at present with no further tax to pay for a basic rate tax payer in 15/16 tax year. As from 16/17 I cannot get an answer as to how these types of ITs (offshore and invested in bonds) will be treated for tax purposes from anyone.

  • 5 atlanticspan September 17, 2015, 2:04 pm

    As a relative newcomer to bond funds, I have to admit,I don’t find the taxation side of them easy to understand at all. Therefore I am really grateful that you have chosen to deal with the subject of tax in your latest piece.
    There is one thing that I am still unsure of which has not been dealt with in your article,and that is the subject ‘top-slicing’. Would you mind writing a sentence or two on this,or perhaps cover it in more detail in a future article.
    Many thanks

  • 6 The Investor September 17, 2015, 3:16 pm

    @atlanticspan — “Top splicing” is just a word that (typically more active) investors use for selling some of their shares/funds after they’ve gone up.

    The ‘house view’ around here is that most people will prove even worse at active investing than they are at playing the flugelhorn or tap dancing, and we suggest passive investing is a better approach.

    Passive investors prefer the term “rebalancing” as it’s more about asset allocation and long-term strategy. See these articles:

    http://monevator.com/tag/rebalancing/

    Hope this helps! 🙂

  • 7 atlanticspan September 17, 2015, 3:36 pm

    Hello TI,
    I’m very grateful to you for your reply and link.
    thank you.

  • 8 Topman September 17, 2015, 5:01 pm

    @TA

    @jon S is very useful info, taking your and my discussion at my quoted link (post 3 above) to a point further forward than we had reached. It may well be now that you have to qualify the classification heading that we agreed i.e. Fixed Interest ITs should be “ISAed”, so as to differentiate between those which are offshore e.g. HDIV and IPE (both CI based) and which pay gross but with no tax to pay for BR taxpayer, and any fixed interest ITs which are not offshore (e.g.?).

    The pond may well be muddier than we had decided.

  • 9 Jon S September 17, 2015, 5:55 pm

    It is indeed muddier and muddled.

    Thought I’d grasped it all then George drops the dividend tax bomb and it’s back to the drawing board.

    Also struggled to find any onshore FI ITs to cite in the post, maybe that answers the question; because the offshore ones are much more tax efficient, see http://citywire.co.uk/money/why-so-many-investment-trusts-are-jersey-boys/a712111

    To illustrate the issues that an unaware investor may face consider two bond funds/trusts operated by the same fund manager Henderson, unwrapped -i.e. not inside ISA or SIPP (all data from http://www.hl.co.uk 17/09/15).

    OEIC – Henderson Fixed Income Monthly Income, gross interest 5.8%, net 4.64% (what you get in your pocket after THEY deduct 20% BRT).

    IT (offshore CI (Channel Isles)) – Henderson Diversified Income, dividend yield 5.6%, 15/16 no tax to pay for a BRT, 16/17 7.5% tax to pay (or may be automatically deducted by the Trust – doubt it for offshore, platform doubt it too) at the year end via tax return.

    So by choosing the IT as opposed to the OEIC AOTBE the investor is 20% (15/16) and 11.5% (probably, 16/17) better off cash wise. Clearly the OEIC should be first to be ISAed.

    Another example of the advantages of a wrapper for bond OEICS before ITs: Royal London Sterling Extra Yield Bond class Y, yield >7% pays out gross, based in Southern Ireland, inside an ISA no tax to pay. Outside ISA BRT 20% tax to pay, so 7% becomes 5.6% in your pocket.

    A further benefit of the ITs vs OEICS for bond funds is (platform dependent) generally lower platform charges AND for offshore ITs no stamp duty on purchase.

    Whether to add another column for onshore/offshore depends on the answer to the question that has not been answered yet.

    Complicated yes, fascinating yes, especially when it’s your own money that’s at stake. Not recommending any particular investment strategy just backing up your article and highlighting the tax implications of different options that investors would do well to be aware of before committing their money.

    As always DYOR.

  • 10 Mathmo September 17, 2015, 6:03 pm

    If there was ever a reason to ensure everything is in ISAs / SIPPs, it’s this.
    I know tax is important.
    I believe that bonds are the right choice for grown-ups (some of the time).

    Important. Grown up.

    Nope. I can’t take it. Zzzzzzzzzzzzzzzz

  • 11 helfordpirate September 17, 2015, 6:40 pm

    While sell/buy of actual gilts does not expose you to CGT it does have income tax implications under HMRC’s Accrued Interest Scheme. When you sell a bond the difference between the dirty price and the clean price i.e the accrued interest, is taxed to income to the seller – because you are essentially getting part of the next interest payment in the price received; and the accrued interest can be set against the next interest payment for the buyer. This is only for holdings over £5k I believe.

    Joy!

  • 12 grey gym sock September 18, 2015, 8:26 am

    hmmmm, this got complicated quickly ……

    i’m pretty sure that any distribution from an offshore closed-end fund is a dividend.

    why so?

    start by distinguishing collective investment schemes and companies.

    collective investment schemes (see http://www.hmrc.gov.uk/manuals/ctmanual/CTM48105.htm and following pages) include UK unit trusts, UK open-ended investment companies, and similar offshore schemes (including ETFs). they have to be open-ended.

    by companies i mean all companies other than those that count as collective investment schemes. companies include investment trusts.

    collective investment schemes may make distributions as dividends or as interest – depending on the 60% rule, as covered in the article. so a scheme will either pay dividends or interest, not a mixture. this applies to both UK and offshore schemes.

    however, UK collective investment schemes (but not overseas ones?) can apply to become tax elected funds (TEFs – see http://www.hmrc.gov.uk/manuals/ctmanual/CTM48911.htm ), in which case they can distribute a mixture of dividends and interest.

    alternatively, UK collective investment schemes (but not overseas ones?) can apply to become property authorised investment funds (PAIFs – see http://www.hmrc.gov.uk/manuals/ctmanual/CTM48811.htm ), in which case they can distribute a mixture of 3 kinds of income: property income, dividends, and interest.

    and what about companies?

    in general, their distributions are dividends.

    if they have obtained investment trust status – which requires them to be resident in the UK (see http://www.hmrc.gov.uk/manuals/ctmanual/ctm47205.htm ), then there is an optional method for them to make some distributions as interest (see http://www.hmrc.gov.uk/manuals/ctmanual/CTM47505.htm ). this doesn’t apply to offshore companies, since they can’t technically be investment trusts, though the term is loosely applied to them.

    and companies which have obtained REIT status are able to distribute a mixture of property income and dividends. i’m not sure if this only applies to UK companies obtaining UK REIT status. there is a similar REIT status in, for instance, the US, but are distributions from US REITs in the hands of UK residents treated as dividends or as property income?

    none of the above exceptions apply to closed-end channel island companies, regardless of whether they invest in fixed-interest (or in property), so i think anything they distribute will be a dividend.

    i can’t imagine that there will be any deduction of 7.5% at source on dividends, even in the UK, let alone in the channel islands.

  • 13 vanguardfan September 18, 2015, 9:21 am

    Interesting. I’m not sure I have fully understood the tax status of some of my holdings. 2 queries:
    1. If I hold bond funds in an ISA or SIPP (vanguard UK registered), should I be reclaiming tax on the distributions? How? A subsidiary question – I hold acc funds in tax shelters because I didn’t think I needed to bother with separating out distributions from growth – is this in hindsight a mistake? (my brokers don’t provide a tax certificate for ISAs/SIPPs, so I’d have to go back to the fund manager for records of the distributions- what a pain – is it worth it I wonder?)
    2. If I hold Vanguard bond ETFs outside of tax shelters, how are gains calculated? As income?? Again, suggests this should best be avoided
    3. If I hold UK domiciled bond funds (Vanguard) outside of tax shelters, these are straightforward – income taxed as interest, gain taxed as capital gain. (Phew!)
    I’ve been unable to decide whether I should allocate bond funds/ETFs preferentially to tax shelters – it seems what you might gain in lower tax on interest (assuming you can get the gross payout) you lose in having fewer of your growth assets (equities) sheltered from CGT. So at the moment I’ve gone for the same bond/equity split in and outside of tax wrappers. Roughly half my invested assets are tax sheltered (this proportion will rise but probably not be eliminated), and the amounts in taxable accounts enough to cause a CGT management issue even on conservative return rates.

  • 14 vanguardfan September 18, 2015, 9:22 am

    Sorry that was a least three queries 😉 Learn to preview…

  • 15 Topman September 18, 2015, 11:05 am

    @jon S et al

    My HDIV holding is ISAed, so I’m OK there but I now am left wondering whether it’s perhaps unnecessary to hold it thus. That question posed, the words which still echo in my head from my post 3 link are, “….. treated in the hands of the shareholder as if it was a payment of yearly interest”, on which basis ISAed it would seem it needs to be.

    Some authoritative clarity on this would be very useful; anyone here able to step up to the plate?

  • 16 helfordpirate September 18, 2015, 12:02 pm

    To add to gregymsock’s excellent summary, there is a further classification of open-ended offshore funds into transparent offshore funds – these are funds that are organised on a partnership basis typically using the French or Luxemburg FCP structure. Many of the Lyxor range of ETF fall in this category e.g. Lyxor Commodity Funds which I hold (sadly!). These funds are opaque for capital gains and transparent for income – that means you have to declare each income type as it is received by the fund as if it was received by you. They qualify for CGT treatment on sale without needing reporting fund status though in practise they all have that status also.

  • 17 magneto September 18, 2015, 2:01 pm

    Since Vanguard and iShares are both domiciled in Ireland, seems we may have a tax headwind on our bond funds, if article being interpreted correctly?

  • 18 Topman September 18, 2015, 2:03 pm

    @Topman post 15

    This expands what my post 3 link said, and seems concisely clear re interest “dividends”.

    http://webarchive.nationalarchives.gov.uk/20140109143644/http://www.hmrc.gov.uk/budget2009/bn27.pdf

  • 19 Jon S September 18, 2015, 2:38 pm

    @Topman

    Re HDIV, it pays dividends. My accountant has investigated this and has entered them as overseas dividends on our tax returns. Our returns have been agreed wth HMRC every year since we first invested in HDIV. Our holdings are with HL in the Fund & Share Account. Payouts are designated “OVR CR – Overseas dividend payment”.

    I don’t know what more to add, this is not a theoretical assessment of the various (and clearly many) guides etc it is a practical summary of how HDIV has been treated unwrapped, in my case, by HMRC.

  • 20 Jon S September 18, 2015, 3:03 pm

    @Topman
    @grey gym sock

    Another potential confusion. Are companies registered in the CI BUT listed on the London Stock Exchange eligible to be called Investment Trusts, I think so and it seems Henderson do too – https://www.henderson.com/ukpi/fund/195/henderson-diversified-income-limited

    Or are they “Offshore Investment Companies “as per the AIC – http://www.theaic.co.uk/guide-to-investment-companies/what-are-investment-companies

    @Topman I’m still looking into this “….. treated in the hands of the shareholder as if it was a payment of yearly interest”,

    What a can of worms you’ve opened.

  • 21 Jon S September 18, 2015, 3:06 pm

    @Topman post 18

    Again doesn’t this HMRC guidance (if not superceeded) only apply to UK ITs and not CI such as our beloved HDIV.

  • 22 The Investor September 18, 2015, 3:27 pm

    @all — I know that @TA has had direct contact with at least three leading fund groups ahead of writing this article in order to double check the facts. 🙂

    Not sure if the stuff he queried (and waited some time to get confirmed even by the professionals!) is what you’re debating but hopefully he’ll be able to pop in over the weekend to share his views…

  • 23 Topman September 18, 2015, 6:47 pm

    @Jon S

    A glutton for punishment, I’ve got my eye on other ITs of the same ilk for the not too distant future!

    I’m usually a “last night of the Proms” man where my TR is concerned, the frisson of fear as the clock ticks towards midnight is an entertainment not to be scoffed at you know, but I might just log in now, and part-complete my 2014/15 solely for enough “pension” income to take me past the PA plus then a theoretical unwrapped HDIV “dividend” to see how it crunches the numbers.

    BTW I’m sure your finance men are the epitome of skill and knowledge but as one of that breed myself, I’ve heard it said that there are actually three kinds of accountant, those who can count and those who can’t!

    Enfin, under SA, HMRC does not review every submitted TR, far from it, so you may just have been kept under the radar thus far.

  • 24 grey gym sock September 18, 2015, 8:56 pm

    the “….. treated in the hands of the shareholder as if it was a payment of yearly interest” thing is described in the HMRC manual (i’ll repeat the 2 links which i messed up with spaces last time) here: http://www.hmrc.gov.uk/manuals/ctmanual/CTM47505.htm

    it only applies to companies which are approved as investment trusts by HMRC, for which they must be UK-resident: http://www.hmrc.gov.uk/manuals/ctmanual/ctm47205.htm … note that a company may be registered in one jurisdiction but resident in another; residence is determined by where the company is controlled, which usually means where the board of directors meets. where its shares are listed doesn’t matter.

    i think that makes it clear that this exception can’t apply to non-UK-resident investment companies. and even for investment trusts that can use it, it’s optional, and other posters say they can’t find UK ITs specializing in fixed interest, so this may rarely come up.

    @vanguardfan –

    1. it’s up to the ISA/SIPP provider to reclaim any tax. they should be doing that without being prompted. i don’t know how it works for accumulation units; though in theory, since non-tax-exempt investors can also hold the units, i’d imagine that only 80% of the interest would be automatically reinvested, and you’d get the other 20% back in cash (or as extra units).

    2. vanguard ETFs outside a tax shelter will have gains taxed as gains, not as income, providing that they are reporting funds. it’s only non-reporting offshore funds which have gains taxed as income. all the mainstream ETFs (and other offshore funds) which are intended for UK investors ought to be reporting funds. it’s something to check more carefully if you’re looking at more obscure offshore funds. though i personally prefer to stick to onshore funds outside tax shelters, to avoid this issue. (also, to avoid the complication of “excess reportable income”.)

  • 25 Jon S September 18, 2015, 10:24 pm

    @all – Well that’s sorted that out then.

    @Topman 23 – re tax return trial, wait to see with interest what you find. We file early because we’re usually due a rebate and I’ve got to file for 6 people so do it in one session, before our summer holidays ;-). Also “how can you spot an extrovert accountant —— he looks at your shoes when he’s talking to you”

    @grey gym sock 24 – have we arrived at the same answer by different routes, seems to me we have.

  • 26 Topman September 19, 2015, 10:56 am

    @Jon S post 25

    I haven’t done the experiment yet but I thought it a good idea just to flag up for the readership here why it is that certain ITs choose to be CI based. I understand that it is not to avoid taxation but rather to avoid the double taxation that they might otherwise be subject to.

  • 27 The Accumulator September 19, 2015, 4:37 pm

    @ Vanguardfan – “If your bond fund is safely dunked inside an ISA or SIPP then you should automatically receive interest payments gross, but it’s worth a double-check email to your provider.”

    @ Old Grey – if I’ve read you correctly, you’re saying that onshore companies (i.e. ITs) can distribute dividends or as interest. I don’t understand why they would distribute as interest as that would make them less attractive from a tax point of view.

    @ Topman – the point we’ve got to seems to be that offshore close-ended vehicles distribute as dividends. UK fixed interest ITs might distribute as interest but in practice this type of bond vehicle doesn’t seem to exist. In which case it seems like the best thing to do at this point is to remove the reference to fixed interest ITs in the tax efficient investing order here: http://monevator.com/tax-efficient-investing-uk-order-isa-sipp/

  • 28 The Accumulator September 19, 2015, 4:43 pm

    @ Atlanticspan – your talk of slices reminded of this that I stumbled upon when researching what part of a person’s income is taxed first:

    Savings and dividend income is the highest part of a person’s total income. The rules are set out in S16 ITA 2007

    – If a person has savings income but no dividend income, the savings income is treated as the highest part of total income.

    – If a person has dividend income but no savings income, the dividend income is treated as the highest part of total income.

    – If a person has both savings and dividend income, the amounts taken together are treated as the highest part of total income, and the dividend income is taken as the higher part of the combined amount.

    Broadly, therefore, the first slice of a person’s income comprises earnings, pensions, taxable social security payments trading profits and income from property. The next slice is savings income, and dividend income is the top slice.

    http://www.pruadviser.co.uk/content/knowledge/technical-centre/rates_of_tax_2013_14/

  • 29 Topman September 19, 2015, 7:02 pm

    @TA

    TBH I can’t advance any good reason why you shouldn’t remove the reference to fixed interest ITs but at the same time I don’t feel convinced about it.

    If I’m still in this frame of mind on Monday, I’ll ring HMRC’s specialist section and ask them.

  • 30 Jon S September 20, 2015, 12:39 am

    @Topman – are you clear about your question to HMRC.

    More complications. FI ITs CI that aren’t actually FI, yet they are classified as such by Trustnet – GCP.

  • 31 Topman September 20, 2015, 11:02 am

    @ Jon S

    Morning 🙂 I’m not entirely a fan of Trustnet, because their numbers sometimes appear questionable e.g. Invesco Perpetual Enhanced Income IT (fixed interest) currently -0.7 discount whereas HL (who I do find reliable) currently show 0.11 premium, and over time I have often seen much bigger disparities for various ITs between Trustnet and other sources.

    As to my call to HMRC tomorrow, which I shall definitely make, I intend to quote HDIV and IPE, and ask which numbers, and where and most importantly why, should be entered on my TR, and I shan’t take any equivocation as an acceptable answer. BTW my “experiment” quickly came to a halt because it required me to make the very categorisation decision that I currently don’t feel able to confidently make.

    One way or another, I intend to sort the “HDIV problem” out!

  • 32 Jon S September 20, 2015, 1:24 pm

    @Topman 31

    Quite agree re Trustnet, especially their quoted yields e.g. NCYF they quote 4.93%, it’s actually north of 7%. Always double check with HL, even then I don’t use the yield they quote. I look at the actual dividend payments in p and divide them by the buy price to get an accurate figure.

    Be very interested to hear the outcome of your call, good luck.

  • 33 grey gym sock September 20, 2015, 6:59 pm

    @TA – yes, onshore ITs appear to have the option of distributing interest, when they’ve received interest. AIUI, when they receive interest, they pay 20% corporation tax on it, leaving them 80% of the gross interest to distribute as a dividend. if they instead elect to distribute as interest, they may still be deducting 20% tax, but that 20% is available as a tax credit to the shareholder. which would be a clear advantage to tax-exempt shareholders; and roughly similar for tax-paying shareholders.

    this is of course unlike when ITs (or any companies) receive dividends. they don’t have to pay any corporation tax on them, since dividends are regarded as paid from after-corporation-tax income.

    presumably investment companies in the channel islands are charged nothing, or close to nothing, in corporation tax on interest they receive. (choosing to be located in CI does look like tax avoidance to me.)

  • 34 The Accumulator September 20, 2015, 7:14 pm

    Thanks, Grey Gym. So onshore IT distributions are paid net and basic rate shareholders have no further tax to pay? Non-taxpayers can claim back but additional and higher rate tax payers would suffer more if interest was paid rather than divis.

    (Sorry I keep getting your name wrong – I’m too obsessed with whistle tests!)

  • 35 grey gym sock September 20, 2015, 10:01 pm

    oh, whistle tests, i see 🙂

    so suppose an onshore IT receives 100 in interest.

    it could distribute 80 interest with a reclaimable tax credit of 20.
    that’s worth 100 to a non-taxpayer.
    80 to a basic rate taxpayer.
    60 to a higher rate taxpayer.
    55 to an additional rate taxpayer.

    or it could pay 20 in corporation tax, and distribute the remaining 80 as a dividend.
    that is worth at most 80, even to non-taxpayers (since the 10% “tax credit” with dividends is not reclaimable – and it will be abolished from next april anyway).
    just considering how this will work from next april: for anybody who isn’t using their full £5k dividend tax allowance, the dividend is worth 80, whatever tax band they’re in.
    but if they’re already over £5k in dividends, it will only be worth 74 to a basic rate taxpayer (after paying the new 7.5% dividend tax rate).
    or 54 to a higher rate taxpayer.
    or 49.52 to an additional rate taxpayer.

    so i reckon that interest distributions are preferable both to non-taxpayers, and to taxpayers who’ve used up their dividend tax allowance.
    dividends are preferable to higher/additional rate taxpayers who haven’t used up their dividend tax allowance.

    though this is all academic, unless there are any onshore ITs who specialize in fixed-interest.

  • 36 Pete September 20, 2015, 10:17 pm

    Another great thread that seems to get more complicated as the ‘experts’ raised issues most of us probably had not thought about!

    It struck me – who should be informing the investor the rules for each pf the scenarios above?
    Each platform? Each fundsheet? HMRC have clear guide?
    Seems far to complicated for the man-in-the-street investor

    Thoughts?

  • 37 Jon S September 21, 2015, 1:18 am

    @The Accumulator 34

    Non tax payers cannot reclaim the DTC.

  • 38 Jon S September 21, 2015, 1:27 am

    @Pete 36

    The fund/trust managers have disclaimers re personal tax liability, the platforms will report your investments according to HMRC rules. Ignore factsheets, no one will help you. Welcome to the world of investing.

  • 39 John September 21, 2015, 8:11 am

    TA, I was with you up until…

    “Some UK-based index-linked gilt funds are exempt from income tax on the inflationary component of interest payments. In other words, if inflation shot up 5% in a year and the gilt paid 1% interest on top of that, then you’d only pay income tax on the 1% and not the other 5%.”

    I’d never heard of this before – could you point me in the direction of your source for this so I can read up a bit further on how this works in practice? On the face of it, this would appear to be a very significant tax advantage.

  • 40 Topman September 21, 2015, 4:11 pm

    @Jon S 32

    The “long trek” beckons! HMRC requires “this kind of query in writing”.

    So be it; it will be done, although possibly not until next week. I’ll report back when I hear back.

  • 41 Jon S September 21, 2015, 6:40 pm

    @Topman 40

    Good luck with that one.

    My finance men (who you know are the epitome of skill and knowledge) inform me that HMRC are currently taking up to 8 weeks to open snail mail and god knows how long to actually formulate a reply. Maybe a reply by tax year 16/17?

  • 42 Topman September 21, 2015, 7:19 pm

    @Jon S

    Par for the course with HMRC! Nil desperandum, I have until 31/01.

  • 43 The Accumulator September 22, 2015, 9:22 pm

    @ Grey Gym – many thanks for your patient explanation. I think that’s about as simple as anyone can make it.

    @ Jon S – yes, well aware of that, cheers.

    @ John – Take a look at page 9 of this doc from iShares – link below. This was further confirmed to me by L&G and Vanguard. Though Vanguard commented that it makes little difference in the current low inflation environment.
    https://www.ishares.com/uk/individual/en/literature/tax-information/tax-implications-ishares-en-uk-pc-faq.pdf

    @ Topman – we salute you.

  • 44 John September 22, 2015, 10:50 pm

    Thanks TA for the link, good find.

  • 45 Topman September 30, 2015, 1:59 pm

    @TA

    Eureka! See this link, post #1

    http://monevator.com/tax-efficient-investing-uk-order-isa-sipp/

    I actually emailed Invesco at the beginning of August but received no reply – until their email today!! I quote, from the horse’s mouth, “I confirm that the distributions from Invesco Perpetual Enhanced Income Limited are treated as dividends. They’re paid net of a notional 10% tax credit.” So, at long last, there we have it! No need now for the “long trek”.

    Their email is printed out and will henceforth reside in my tax data file!

  • 46 Jon S September 30, 2015, 7:06 pm

    @Topman 45

    That’s good news and another confirmation of the CI IT payments being dividends (see 19 above). So that seems to be the consensus position for tax year 15/16, hopefully.

    What about 16/17, will the CI dividends fall within the new dividend tax or not? and if so at what point will the tax be paid, pre distribution, at the platform level or via an individuals tax return.

    Many of the practical questions remain unanswered, someone somewhere must be working on this.

  • 47 The Accumulator October 3, 2015, 9:13 pm

    Well done, Topman. What an epic journey. Don’t lose that email!

  • 48 Topman October 4, 2015, 2:15 pm

    @TA

    Merci beaucoup :-). No need for you to respond but seemingly the 60% rule is circumvented somehow.

  • 49 Jas December 31, 2015, 10:34 pm

    I received an email from Halifax share dealing (I am thinking of opening an ISA with them), and they stated that “as an execution only broker, we do not reclaim back tax on bond fund distributions” and I was told to contact HMRC to find out how to do this.

    Could anyone please shed some light??

  • 50 Jon S January 2, 2016, 1:58 am

    @Jas 49

    Are you advised (I suspect not).

    What are you planning to put in your ISA and why.

    Is it this tax year or next.

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