Mini Equity ISA in gilts and bonds

deemy2004

R_._Tatac wrote:

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

Income from ALL bonds including GILTS within ISA's is TAX FREE ! This is also my strategy

Though Ive plopped in some index linked gilts, buy them during a downtrend in inflation and you pick them up cheap. Or if there are sudden unexpected drop in the month to month inflation stats as they are released (especially RPI, since it is that on which the indexation is based).

If you buy 2 or 3 year bonds, then interest rates are NOT going to effect the value much, not unless than bond has a very high or low coupon say 12% then yes you would lose capital to account for the extra interest but if the bond is yeilding say 5% then there is not going to be much difference if any between the current price and the £100 you get per 100 nominal stock.

Also look into PIBS..... though more risky.........

R_._Tatac

Dont the bonds have to have 5 years or more to run to make then acceptable for "wrapping" in the ISA ?

RT

lipidicman

R_._Tatac wrote:

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 .....

We were clearly thinking the same thing!

Anyone?

R_._Tatac

For anyone out there confused by this as I was I think I now have all the answers. Of course I'm not qualified to give advice and am simply someone who has tried to find out the facts.

If like me you already have a mini cash isa for this tax year you are also permited to put £3000 into a mini stock and shares isa but if you dont like gambling on the stock market as I dont ( I bought Danka Business Systems , Pace Micro technology and Ionica shares in the past ! ) you can hold gilts inside this stocks and shares isa.

I have chosen https://www.comdirect.co.uk to be my mini stocks and shares isa provider and they will charge me a flat rate of £25 per year managment fee. On top of this I'll also pay £12.50 per trade but I only intend making one trade to buy £3000 of gilts.

Interest from these gilts will be paid twice yearly into my comdirect account and I am free to reinvest that interest as soon as it is received into any of the allowable investments such as stock and shares and bonds so you can basically start to compound the value of your isa.

Equally you are able to draw out the interest to your nominated bank account but you cannot then put it back in if you have used up the years allowance already.

Next Tax Year I will be able to choose to invest £4000 into this ISA due to a change in the rules ( something to do with the end of Insurance ISAs ).

Comdirect were able to answer all the questions I had , i'm sure they will do the same for anyone else , their number is 0870 600 6044 but there is no need to call that number when you can use your Call 18866 account to call their proper number 020 7517 4691.

Hope this helps

RT

R_._Tatac

Usefull website

http://www.dmo.gov.uk/


RT

R_._Tatac

If my calculations are correct then this certainly appears to be worthwhile for a higher rate tax payer .... anything wrong with these figures ?? I passed O-Level maths but couldnt grasp the higher level I had to tolerate at college !

4.75 treasury 2010
ISIN Code GB00B033024
Redemtion Date 7 June 2010

Trading at approx face value.

Comdirect Fees £25 + £12.50 = £37.50

Interest on £3000 @ 4.75% = £142.50

Interest after Fees = £105

So interest after Fees = 3.5% Tax Free
= 4.66 Gross @ 20% TAX
= 5.83 Gross @ 40% TAX

Next Tax Year

Assuming bonds still trading around their face value but likely to be lower of there is a
.25% interest rate rise I think.

Buy another £4000 - New Mini Isa Limit

Comdirect Fees £25 + £12.50 = £37.50

Interest on £7000 ( assumes you withdrew any interest ) @ 4.75% = £332.5

Interest after fees £295

So Interest after fees = 4.21% Tax Free
= 5.61 Gross @ 20% Tax
= 7.01 Gross @ 40% Tax

RT

lipidicman

3.5% net is
3.5/0.8 = 4.375 for a 20% tax payer

4.21% net is
4.21/0.8 = 5.26 for a 20% tax payer

strange that you got the 40% tax equivalents right though!


I also want to do this - as a standard rate tax payer this isnt quite so lucrative - but it is still good. Do I really have to go self select? Also I dont really understand about the 'current price' of gilts. Am I buying them second hand? I thought I could buy them - hold them for 5 or more years - their 'whole period' and then sell at the same value and take the interest.

There is lots of good info here - but I am still confused. Why does it all have to be so hard? Somebody is probably going to say 'it dont take a PhD!' - but I have one of those!

Dr L

R_._Tatac

It took me a while to figure out why my figures were wrong , basically I had worked out the 40% figures first ( because they were what interested me most ).

I had taken the net figure eg. 3.5% and divided it by 3 to get the value of 1/5 of the gross then times that by 5 to get the full gross.

3.5 / 3 = 1.1666666 then x 5 = 5.8333333 %

I had then worked back from the 40% figures which I realise now looking at it is wrong.

So I did 1.1666666 x 4 = 4.666666

I should have done

3.5 / 4 = 0.875 then x 5 = 4.375 %

Gilts are traded on the open market so yes they are second hand ( unless you buy a new issue ) but when they are due for payment they pay back their face value so it can get quite complicated to work out the return.

Doing what I did and buying bonds that are trading very close to face value and due for repayment in just over 5 years seems to take the complication out of it because you are going to get the quoted % return or as close as doesnt matter.

Interest is paid twice a year so it's likely you will buy bonds with some interest already accrued which you have to pay for ! This is called the dirty price of the bond as opposed to the clean price you will be quoted.

For example I bought the following.

Treasury 4 3/4 Sto 2010 ( 4.75% interest and repayment in 2010 )

£2,950.06 face value of stock at £99.90 for £100 worth = £2947.11

105 days accrued interest on the stock cost me £40.38

Commision cost me £12.50

Total £2999.99

You dont have to work any of this out , just call comdirect and ask to spend £3000 on Treasury 4.75% 2010 and they quote the price and you decide if you want to proceed.


Have fun

cheerfulcat

Hi,

Just to say - it's not at all difficult to determine the return on any given gilts - look for the GRY, or gross redemption yield; it's always quoted with the price.

http://focus.comdirect.co.uk/en/gilts/giltlist/index.html

There was an interesting thread on this very subject on the Motley Fool recently -

http://boards.fool.co.uk/Message.asp?mid=9178062&sort=whole

BTW, gilts are very popular right now ( pension funds ), so you are in fact *guaranteed* a capital loss if you hold to redemption , unless you buy at issue...

HTH

Cheerfulcat

R_._Tatac

if you buy £100 worth for £99.90 how can that guarantee a capital loss ??

Am I missing something ?