We look at the tax implications of holding bonds and gilts.
Monday was a funny old day. The 1st of February is reportedly the number one pull-a-sickie day in the UK, with scores of people across the country suddenly developing serious illnesses requiring them to stay at home, tucked up in their duvet. This fact is probably mildly interesting, and mildly annoying to anyone who was genuinely ill on the day.
February 1 was also the day the BBC's Robert Peston launched an attack on the Tories, claiming that their plans for a slower repayment profile of the national debt would "give the willies" to those institutional investors who purchase gilts. Perhaps retail investors will ride to the rescue as, by amazing coincidence, the London Stock Exchange chose Monday to launch its new bond market.
Moneypennies
The new bond market has been modelled on the highly successful Borsa Italiana which, with €230 billion worth of trading in 2009, is Europe's largest retail fixed-income market.
In addition to gilts, an initial nine UK corporate bonds are available, and Royal Bank of Scotland (LSE: RBS) has already stated its interest in including its own bonds within the scheme (which are already listed on Borsa Italiana).
Investors will be able to invest in increments of £1 for gilts and £1,000 for corporate bonds, with online two-way prices and transaction fees levied by LSE of just 90p per transaction.
This is certainly an interesting prospect, and interested parties can visit the LSE's dedicated new website www.londonstockexchange.com/bondsmadeeasy for more information.
Q?
Much as I love disappearing cars and tranquilliser dart firing pens, the Q here is a question about something altogether more mundane. Tax.
Although the new retail bonds market is aimed at making bonds and gilts as accessible as equities, they are not equities and there are some important tax differences to be borne in mind.
First and foremost, gilts, and qualifying corporate bonds (QCBs), which the bonds listed are almost certainly are, are not liable to capital gains tax. That's right I did say that. Both types of bond are specifically exempt from capital gains tax, so any profits earned will not be charged to tax. Although on the flip side, any losses incurred will not be allowable either. However, the very nature of this type of bond investment is that it is a less volatile market, so huge gains and losses are less likely.
There may also be additional income tax charges on purchases or sales of gilts under the accrued income scheme -- in simple terms where the price of gilts is inflated as a result of 'cum-div' interest payments due, a charge may arise.
The coupon paid on bonds is treated for income tax purposes as interest, rather than as a dividend, although this distinction is unlikely to have any effect on most taxpaying Fools.
ISA all OK, si?
Forgive my poor Italian imitation, but the eligibility of retail bonds as an ISA investment is an important point. Retail bonds per se are not excluded as allowable investments, but for both gilts and bonds, the redemption date must exceed five years in order to qualify.
That is not to say that the bonds or gilts must be held for five years, nor that there would necessarily be an issue if, for some reason, the bonds were redeemed before five years were up. However, the stated redemption date on the bond must be at least five years from the date of purchase.
Looking at corporate retail bonds available at the moment, most would be ISA-able investments, but the Morgan Stanley bonds would not, and should be refused by your ISA fund manager.
So what do you think? Will you be investigating this new investment opportunity? Have you got a spare £200bn to spend on gilts to prop up the UK national debt? Will the UK lose its AAA energy efficiency rating for borrowing?
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