National Grid launches first ever inflation-linked retail bond

Sceptic001

SnowMan wrote: »

Link to the article. Although it contains some obviously weak analysis...

The article is factually incorrect in its key point. The bond does not pay

an annual interest rate of 1.25pc above the rate of inflation, as measured by the Retail Price Index (RPI).

The coupon (interest rate) starts at 1.25% and it rises each year in line with inflation. So if inflation is 5% it pays a coupon of 1.3125%

The capital value is protected against inflation so if inflation over ten years is 50% it returns £150 for every £100 invested. This is the main benefit for investors. Traditional corporate bonds only repay the original investment so their value is seriously eroded at times of high inflation.

I have emailed the journalist to ask her to rectify this serious error.

buglawton

Mentioning Railtrack in the same breath as Nat Grid just put the mockers on this for me!

Also, notice that there is a perverse incentive for Govt tax raising: The higher inflation is, the more tax they rake in on savings, assuming an identical 'real' interest rate (another discussion I know).

Sceptic001

buglawton wrote: »

Mentioning Railtrack in the same breath as Nat Grid just put the mockers on this for me!

Railtrack was a profitable company (albeit with a dodgy safety record ) bankrupted by the Labour government for political reasons. Not really comparable with National Grid. Nevertheless, as a matter of interest, does anybody know what happened to Railtrack corporate bond holders? Did they get their money back?

buglawton wrote: »

Also, notice that there is a perverse incentive for Govt tax raising: The higher inflation is, the more tax they rake in on savings, assuming an identical 'real' interest rate (another discussion I know).

These bonds pay less interest than traditional corporate bonds. The benefit comes with the capital gain after ten years, so I don't think there is any perverse incentive for the government to fire inflation because of these bonds. Of course inflation does conveniently eat away at the National Debt, but I don't think there is a link here.

ses6jwg

As Duncan Bannatyne would say..."I'm out"

Ark_Welder

http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM28155.htm

IHTM28155 - Investigating liabilities: income tax on the disposal of deep discount securities

A deep discount security is any redeemable security (other than a share) that is issued by a company at a discount on the amount payable on redemption where the discount:

• is equal to more than 0.5% a year or
• more than 15% overall.

When the security is transferred or redeemed the profit realised from the discount is taxed as income of the investor

http://www.hmrc.gov.uk/manuals/saimmanual/saim3020.htm

The general rule

ITTOIA05/S430 explains the meaning of ‘deeply discounted security’ (DDS). It is a security where the amount payable on maturity, or any other occasion when the security can be redeemed will or may exceed the issue price by more than 0.5% for each year in the redemption period, up to a maximum of 30 years. The redemption period is the period between the date of issue and the date of redemption. In effect the amount is the lower of

• 0.5% of the redemption amount for each year of the bond's original maturity, or
• 15% of the amount payable on redemption.

.
.
.
Example 1

Company A issues securities for £1,000 which are redeemable in 10 years time for the subscription amount increased by the percentage movement in the Retail Price Index over the same period. As the linkage to the RPI may give more than a 5% increase in value (10 years x 0.5%) over that period, the securities are deeply discounted securities.

A bit of help led to these HMRC documents and my reading of them is that the bonds are Deep Discounted securities and a disposal (either before or at redemption) would, therefore, be taxed as income and not as a capital gain [edit] if held outside an ISA and SIPP.

Ark_Welder

http://www.nationalgrid.com/NR/rdonlyres/C7555550-52CD-4CDD-9833-7023554AEE80/49009/10199_1_NG_retailbond_brochure_v6_Final_Singles.pdf

Transfer or other disposal
(including redemption)

Any profit made on a transfer or other disposal
(including redemption) of bonds by an individual
who falls within category (i) or (ii) above will be
taxed as income, and there will be no chargeable
gain or loss for capital gains tax purposes, due to
the bonds being “deeply discounted securities”
for UK tax purposes.

So hold inside an ISA or SIPP to avoid having to pay income tax upon disposal. Unless you can guarantee that you won't be a taxpayer in 10 years time...:)

Official info for those interested at:
http://www.nationalgrid.com/corporate/Investor+Relations/DebtInvestors/RetailBond/agree/

oldvicar

Ark_Welder wrote: »

http://www.nationalgrid.com/NR/rdonlyres/C7555550-52CD-4CDD-9833-7023554AEE80/49009/10199_1_NG_retailbond_brochure_v6_Final_Singles.pdf

So hold inside an ISA or SIPP to avoid having to pay income tax upon disposal. Unless you can guarantee that you won't be a taxpayer in 10 years time...:)

Official info for those interested at:
http://www.nationalgrid.com/corporate/Investor+Relations/DebtInvestors/RetailBond/agree/

Suggestions of firms offering an ISA wrapper to obtain these through would be most welcome

oldvicar

oldvicar wrote: »

Suggestions of firms offering an ISA wrapper to obtain these through would be most welcome

If I'm allowed to answer my own question, then I suppose these listed on the Nat Grid website might be the ones:

Authorised Distributors:
- Barclays Stockbrokers
- Charles Stanley
- Killik & Co
- Redmayne-Bentley LLP
- Selftrade
- Smith & Williamson Securities
- Williams de Broë

Sceptic001

Ark_Welder wrote: »

http://www.nationalgrid.com/NR/rdonlyres/C7555550-52CD-4CDD-9833-7023554AEE80/49009/10199_1_NG_retailbond_brochure_v6_Final_Singles.pdf

So hold inside an ISA or SIPP to avoid having to pay income tax upon disposal. Unless you can guarantee that you won't be a taxpayer in 10 years time...:)

Official info for those interested at:
http://www.nationalgrid.com/corporate/Investor+Relations/DebtInvestors/RetailBond/agree/

Thanks for that, Ark Welder. I have amended my earlier post accordingly.

On a different point, I am disgusted that the Telegraph has not corrected its grossly misleading article, even though someone (inappropriately calling him/herself "whacko") has commented pointing out the error. :mad:

Ark_Welder

oldvicar wrote: »

Suggestions of firms offering an ISA wrapper to obtain these through would be most welcome

First port of call would be your existing S&S ISA provider - if they hold shares and bonds as well as funds. They may be able to make a purchase if you have cash available in the account. If not, then a couple of the Authorised Distributors listed on NG's web-site state that an S&S ISA can be opened with them to make the purchase - but check out the annual charges first.

Alternatively, the secondary market, but this will involve transaction costs and possibly a purchase price that is above the issue price.

No certificates will be issued - all holdings will be electronic. So the above applies to anyone that wishes to make a non-ISA purchase too.