Is the interest on bond funds taxed?

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deadpeasant
deadpeasant Posts: 91 Forumite
in Savings & investments
I've just been reading the Savings/ISA section on this site, and in discussing the benefits of wrappers it says
If you’re investing in bonds such as corporate bonds or Government gilts, then you get the income without it being taxed in any case. For other bonds, a stocks & shares ISA will shelter the income from tax.
I'm not sure what this means, esp 'other bonds', and whether it includes funds. HL states for each fund whether the income paid is 'dividend' or 'interest'. I thought that 'interest' payments were subject to tax unless wrapped, which is the main reason I have my 'interest' earning funds wrapped. (I'm basic rate, and calculations suggest CGT won't be much of a worry.) Would income from eg Baillie Gifford High Yield Bond or Invesco Perpetual Distribution be tax free even outside a wrapper?

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  • Hominu
    Hominu Posts: 1,671 Forumite
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    https://www.gov.uk/tax-buying-selling-shares/buying-shares
  • xylophone
    xylophone Posts: 44,412 Forumite
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    The income on gilts held outside an ISA is not tax free - if paid gross, and you are liable for tax, you must declare it.

    http://www.dmo.gov.uk/index.aspx?page=Gilts/Gilts_Tax

    The income on corporate bonds held outside an ISA is not tax free and if you are liable for tax must be declared.

    http://www.hl.co.uk/shares/corporate-bonds-gilts/learn-about-bonds/faqs

    Income on the Invesco Perpetual Distribution Fund is interest- it is tax free within an ISA. It is possible to hold the Gross class within an ISA but if one of the net classes is held, the ISA manager will reclaim the tax.

    If IPD is held outside an ISA, the income will be paid net- if you are a non-taxpayer, you can reclaim the overpaid tax - if you are a standard rate taxpayer you don't owe any more tax but if you are a higher rate tax payer you will need to contact HMRC.
  • deadpeasant
    deadpeasant Posts: 91 Forumite
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    So am I right that the passage I quoted is wrong and/or misleading? I can't understand what it was intended to mean.
  • jimjames
    jimjames Posts: 17,619 Forumite
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    edited 29 April 2014 at 1:18PM
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    deadpeasant wrote: »
    So am I right that the passage I quoted is wrong and/or misleading? I can't understand what it was intended to mean.
    The passage is correct and means what it says as per the previous reply.

    It is exactly the same with some National Savings products where they are paid gross. Just because it is paid gross doesn't mean it is tax free.

    Inside an ISA you will not pay any tax, outside an ISA you will pay whatever tax rate is appropriate to you when you declare it on your tax return. Dividends are already taxed so outside an ISA will not cost any more to a basic rate taxayer, interest that isn't is still liable to income tax.
    Remember the saying: if it looks too good to be true it almost certainly is.
  • deadpeasant
    deadpeasant Posts: 91 Forumite
    edited 29 April 2014 at 7:15PM
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    Thanks for replying. Could you please unpack what is meant/implied here by "For other bonds, a stocks & shares ISA will shelter the income from tax"? What is meant by "other bonds"? Would IPD be an example?

    Is it like this:
    gilts and corp bonds - paid gross
    others (eg IPD?) - paid net unless in an ISA
    ?
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