Mini Equity ISA in gilts and bonds

edited 30 November -1 at 1:00AM in ISAs & Tax-free Savings
22 replies 1.8K views
lipidicmanlipidicman Forumite
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edited 30 November -1 at 1:00AM in ISAs & Tax-free Savings
I have used my Mini Cash ISA allowance and have some money in regular and other high interest savings accounts too.

I am thinking of using my mini equity allowance to buy gilts or corporate bonds. Am I right that although these pay out a guaranteed(?) amount after 5 years, this is OK for equity ISAs (unlike GEB type products which end up as mini-cash ISAs) as it passes the 95% rule within 5 years (I'm a little vague here).

So two questions. Firstly is this a good idea for somebody who wants to use more of their ISA entitlement but doesnt like the risk of stocks and shares? Secondly, where do I look to get one?

I guess I could always transfer the allowance to stocks and shares later, but if I dont use it I lose it! Is this correct?

Thanks in advance
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Replies

  • Can anybody even give me a pointer to start some research?
  • Quiet in this board isnt it?
  • isasmurfisasmurf Forumite
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    Ssshhhh... you'll wake everyone up... :D

    Gilts and corporate bonds last for varying lengths of time. They are generally available through a fund in an ISA, and are more tax efficient than Equity in an ISA.

    Gilts and corporate bonds are seen as less risky then Stocks and Shares, but it is important to remember their value can fluctuate, just as any Share value can.

    I think you should read up on Gilts and corporate bonds just so you know what you are investing in and the pitfalls.

    The FSA have a good tutorial on investing here with a section devoted to bonds.

    In answer to your questions, yes it could be an option, but you must remember that you aren't guaranteed to get your capital back. Look at any of the major fund supermarkets to find some corporate bond funds.
  • ReaperReaper Forumite
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    Here is a brief explanation as to why gilts vary in value, despite many people thinking they don't.

    A gilt is the government borrowing money off you. Suppose they offer a 5% gilt lasting 5 years. You will get that sum each year (the interest rate is fixed) and at the end of the 5 years you get your capital back too.

    Now suppose you decide to sell the gilt to somebody else after 2 years because you need the cash. Meanwhile interest rates have shot up and gilts are now being offered for 10%. Obviously a buyer isn't going to be terribly interested in yours any more and will offer you less than you paid for it. And it's not just current interest rates, but the expectation of what interest rates will do in the future which sets the market price of a gilt. Also the price is affected by how close to the redemption date you are.

    Now if you buy into a fund that consists of gilts they are continuously buying and selling them so you get this fluctuation in its value.
  • But if I buy a gilt and hold it the full term I am certain to get the return quoted.

    I just need to avoid a fund that trades in gilts right?

    A little less confused - but only a little!
  • dunstonhdunstonh Forumite
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    But if I buy a gilt and hold it the full term I am certain to get the return quoted.


    You will get the rate quoted in the interim and when it hits maturity you will get back £100. Depending on how much you paid for that gilt will depend on the real rate of return. i.e. if you paid £120 for them, you are going to face a capital loss.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • If you open for example a self select mini isa at https://www.comdirect.co.uk and buy £3000 of government gilts fixed at say 3% and with more than 5 years left on them how exactly do you get the interest ? would you get 1.5% credited to your comdirect account every 6 months or do you get a cheque for 1.5% every six months and in the case of it getting credited to your account can you buy more gilts with it during the same tax year ?

    More importantly do you receive this 3% interest TAX FREE and therefore you dont need to show it on your tax return ? This would make it like a 5% return for a higher rate tax payer ??

    Thanks for any tips

    R.T
  • ReaperReaper Forumite
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    I believe that the income from gilts is taxable, but if you happen to get a capital gain that is not. In the case of income it is paid gross but you will need to declare it.

    That is my understanding of holding a single gilt directly. I think a gilt fund, however, is treated as a normal unit trust and taxed just like any other unit trust.

    I don't know how ComDirect do gilts, probably through a fund though.

    I might be wrong about all this so best to double check.
  • thanks for the reply , I'm talking about buying actual gilts and having them "wrapped" in the ISA , not gilt funds ..... I wonder if I am getting confused about what is possible .....

    Any further info welcome.

    RT
  • I think I have eventually found the answer to the tax status of the interest on this page http://www.alifa.co.uk/guides/isa/tax_benefits.htm

    It says this

    "Cash ISAs are free of income tax. Other types of ISA are not necessarily free of income tax -it depends what they are invested in. Since 6 April 2004, any income from shares or share-based unit trusts within an ISA is paid with tax at 10% already deducted and this cannot be reclaimed. But there is no tax on any other type of income - for example, interest from gilts or corporate bonds - held within the ISA."

    So the interest seems to be tax free , great news .... all I want to know now is how it is paid ? cheque or by some type of credit to the comdirect.co.uk account and in the case of the later can it be re-invested in yet more gilts in the same tax year ?

    RT
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