Okay, there’s no solution to sugar this: I’m writing about tax on bonds, so I’ll maintain it brief, if not precisely candy.
Bond taxation is complicated and life is fleeting and so – double-quick – right here’s what you’ll want to know to maintain on the proper aspect of the taxman:
- Bonds will not be taxed the identical as equities.
- Offshore bond funds will not be taxed the identical as onshore ones. (In different phrases, the remedy could also be totally different in case your bond fund sits outdoors the UK.)
- Change-Traded Funds (ETFs) will not be taxed the identical as bond funds.
The next two tables sum up the revenue tax and capital good points tax remedies and variations between the primary forms of bond automobile.
Additional clarification lies beneath.
Tax on bonds: curiosity
| Bond fund (OEIC, Unit Belief) | Bond ETF | Particular person gilt | Particular person bond | |
| Tax on curiosity | Revenue tax price (e.g. 20%) | Revenue tax price | Revenue tax price | Revenue tax price |
| Curiosity paid gross or internet of tax | Gross | Gross | Gross | Gross |
| ISA / SIPP shelter | Exempt | Exempt | Exempt | Exempt |
Word: Bond funds have paid revenue gross since 2017.
Tax on bonds: capital good points
| Bond fund (OEIC, Unit Belief) | Bond ETF | Particular person gilt | Particular person bond | |
| Capital good points tax (CGT) | Payable | Payable | Exempt | Payable until a qualifying company bond |
| Non-reporting fund (offshore) | CGT payable at revenue tax price | CGT payable at revenue tax price | 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 have a look at the main points.
The place must you stash your bonds and bond funds?
In case your fund is greater than 60% invested in fastened curiosity and money at any level throughout its accounting 12 months then its distributions depend as curiosity funds – not as dividends.
Distributions / extra reportable revenue will due to this fact be chargeable for revenue tax at your customary price, relatively than softie dividend tax charges.
You may keep away from revenue 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 revenue gross – that’s, with no tax deducted. A welcome simplification.
The tax price you’ll pay on bond revenue will rely in your total revenue tax standing.
Non-reporting bond funds could pay curiosity gross. Extra on non-reporting funds under.
To carry a person bond in your ISA or SIPP it should be listed on the inventory change or issued by a listed firm.
Particular person gilts are immune from capital good points tax.
Gilt funds, nonetheless, pay tax on capital good points.
Following the nice bond rout of 2022 – which scythed by gilt costs – the absence of CGT on particular person gilt good points might make holding low-coupon gilts with excessive redemption yields essentially the most tax-efficient choice for you. Do your sums rigorously.
Offshore bond funds
If an offshore fund / ETF doesn’t have UK reporting standing then capital good points are payable at revenue tax charges.
That’s dangerous information as a result of capital good points tax charges are a lot friendlier than revenue tax. The £6,000 tax-free capital good points allowance – falling to £3,000 from 6 April 2024 – would depend for nought on this occasion. And better-rate taxpayers would pay (revenue) tax on their capital good points at 40% as an alternative of 20% in CGT.
Be certain your offshore bond tracker says it’s a reporting fund on its factsheet. HMRC additionally publish an inventory of reporting funds.
Offshore bond funds / ETFs are topic to withholding tax identical to fairness funds.
In case your bond fund is domiciled within the UK then reporting standing and withholding tax isn’t a difficulty.
Index-linked Gilt ETF vs Index-linked Gilt Fund taxation
Some UK-based index-linked gilt funds are exempt from revenue tax on the inflationary element of curiosity funds.
In different phrases, if inflation shot up 5% in a 12 months and the gilt paid 1% curiosity on prime of that, then you definately’d solely pay revenue tax on the 1% and never the opposite 5%.
Nonetheless, offshore index-linked gilt ETFs will usually impose revenue tax on the entire curiosity cost (together with the inflation-based component) as a result of they don’t take pleasure in the identical exemption as an onshore fund.
So in case you’re stocking up with an index-linked gilt fund then search for a tracker fund that’s primarily based within the UK. (E-mail the supplier to verify they’re packing a tax exemption on inflation-linked curiosity.)
Take it regular,
The Accumulator
Word: This text on tax on bonds is an up to date model of our 2015 authentic. Feedback under could consult with previous data, so double-check something earlier than appearing. We’ve left previous feedback intact as there’s some good tidbits as standard.
