Okay, there’s no way to sugar this: I’m writing about tax on bonds, so I’ll keep it short, if not exactly sweet.
Bond taxation is confusing and life is fleeting and 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.
- 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 on bonds: 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 | Gross | Gross | Gross | Gross |
| ISA / SIPP shelter | Exempt | Exempt | Exempt | Exempt |
Note: Bond funds have paid income gross since 2017.
Tax on bonds: 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 |
That’s the tax on bond and bond fund 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.
You can avoid income tax on bonds and bond funds by tucking them away inside your ISA / SIPP – or by being a non-taxpayer.
Since 2017, bond funds registered as OEICs or Unit Trusts pay their income gross – that is, with no tax deducted. A welcome simplification.
The tax rate you’ll pay on bond income will depend on your overall income tax status.
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.
Individual gilts are immune from capital gains tax.
Gilt funds, however, pay tax on capital gains.
Following the great bond rout of 2022 – which scythed through gilt prices – the absence of CGT on individual gilt gains could make holding low-coupon gilts with high redemption yields the most tax-efficient option for you. Do your sums carefully.
Offshore bond funds
If an offshore fund / ETF does not have UK reporting status then capital gains are payable at income tax rates.
That’s bad news because capital gains tax rates are much friendlier than income tax. The £6,000 tax-free capital gains allowance – falling to £3,000 from 6 April 2024 – would count for nought in this instance. And higher-rate taxpayers would pay (income) tax on their capital gains at 40% instead of 20% in CGT.
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 an index-linked gilt fund 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
Note: This article on tax on bonds is an updated version of our 2015 original. Comments below may refer to old information, so double-check anything before acting. We’ve left old comments intact as there’s some good tidbits as usual.
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?
I take it with bond focused Investment Trusts that you just treat these as standard equities for tax purposes?
@rugbytrader – “….. treat these as standard equities …..”
Nope! Read and inwardly digest
http://monevator.com/tax-efficient-investing-uk-order-isa-sipp/
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.
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
@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! 🙂
Hello TI,
I’m very grateful to you for your reply and link.
thank you.
@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.
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.
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
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!
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.
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.
Sorry that was a least three queries 😉 Learn to preview…
@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?
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.
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?
@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
@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.
@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.
@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.
@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…
@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.
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”.)
@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.
@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.
@ 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/
@ 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/
@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.
@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.
@ 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!
@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.
@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.)
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!)
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.
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?
@The Accumulator 34
Non tax payers cannot reclaim the DTC.
@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.
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.
@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.
@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?
@Jon S
Par for the course with HMRC! Nil desperandum, I have until 31/01.
@ 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.
Thanks TA for the link, good find.
@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!
@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.
Well done, Topman. What an epic journey. Don’t lose that email!
@TA
Merci beaucoup :-). No need for you to respond but seemingly the 60% rule is circumvented somehow.
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??
@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.
@ Jas – Have you tried googling how to claim back tax on interest? Bond distributions are just interest and HMRC put pretty much everything online – saves them a phone call 😉
This would be a great page for an update, particularly after the change to personal savings allowance. The income tax treatment of income from a mixed fund like Vanguard Lifestrategy 40% would be intersting.
I would also welcome an update on this article, with a recent further drop in interest rate of a savings account finally pushing me to buy bonds. I opted for a catch-all fund of Vangaurd’s Global Bond Index Fund – Hedged Income. I am holding this outside of an ISA where I hold “inc” funds so as to simplify the tax. For shares I know what gets paid out is dividends (and can declare as such at the end of the tax year). I think the bond fund is paying out interest.. but the article suggests some tax is already deducted: was this prior to the interest taxation change, where banks now pay gross and people have a personal interest tax band? The Vanguard website says the fund is “UK Reporting” and the distribution “Tax treatment” is “Gross”, which doesn’t align with the article.
Thanks for the update @TA.
@All: caution advisable with Qualifying Corporate Bond status. Recommend reading the Revenue’s published guidance before deciding whether to take the plunge (“CG53702 – Qualifying corporate bonds: general definition”; covering section 117 of the Taxation of Chargeable Gains Act 1992, is a good starting place, updated as recently as this Wednesday, at least according to its webpage).
As the guidance notes, the law has changed since the first QCB legislation in 1984, and what started as a QCB may not still qualify.
As always, DYOR and Your Mileage May Vary.
FWIW (not much), personally I’m not very keen on Corporate Bonds. Lack the upside participation of Equities with additional drawbacks (credit risk) compared to high quality Government Bonds. The current premium (in yield terms) for CBs over Gilts doesn’t seem worth it to me.
I thought since April 2016 all bond fund interest (like bank interest) was paid gross??
Have to go check my tax certificates….
Useful to re-read the bit about claiming 20% back on funds. I’d either forgotten or never heard of that. Thankfully doesn’t affect me at the moment.
The CGT treatment is just weird, makes no sense to me but hey-ho. I guess seeing as I’m sitting on enormous losses it’s neither here nor there though. A major miracle will have to occur for me to be thinking about a gilt-based capital gain within my lifetime.
@helford pirate — Eek, don’t say that! I know bank interest is but wasn’t aware with bond interest.
I did the update duties on this article not @TA (who continues to labour under a work deadline) so I may well have missed this.
Posted the article a day before sending the email newsletter to try to crowdsource anything I missed. Could you not read the article on site the second it is posted? Tsk tsk. (Note: I’m joking in this latter bit, obviously! Very much appreciate all feedback, just HATE sending out emails with errors).
Seems you’re correct re: gross payments from bond funds @Helford Pirate. Changed in 2017.
https://www.columbiathreadneedle.co.uk/en/intm/our-products/significant-fund-changes/gross-payments/
Thanks for flagging. (I’ve not held any unsheltered for many years)
Oh good, I can forget about it all over again!