Bonds and not a clue

PaulCooper

I have a vague idea about bonds and need to know a bit more.
I have some money to invest (yes lucky me) and want to avoid income tax, I assume if I invest in bonds the Coupon (interest) that is payable on a regular basis is classed as income and taxed as such---- please confirm.
What about if I invest in bonds with a zero Coupon and a gain on maturity, does that count as a Capital Gain and taxed as a Capital Gain and not Income?
I'm sure that sounds a very basic question, but have sympathy, I need to learn!
Paul

Jegersmart

You can avoid tax by investing within an ISA wrapper for example.

J

gadgetmind

Yes, bonds paid out as income and is taxable. Income from collective investments (UTs, OEICs, ITs, REITs) etc can be paid as either income, dividends or both depending on the fund's holdings.

Equities (ordinary and preference) pay out as dividends and there is no further tax for a basic rate tax payer.

Some ITs also have a split structure with some equity having zero coupon.

It's complicated!

PaulCooper

Thanks for starting the ball rolling.
I will be maxed out on ISA
The amount I have to invest is a fair amount, that's why I want to find a safe investment product that doesn't provide an income and is taxed as such, but provides a capital gain over a period of time and uses my CGT allowance which otherwise will be unused.
The dividend route isn't that attractive as I'm higher tax rate payer.
We will go down the route of using other half's basic rate tax allowance, but due to other incomes she will become higher rate payer if I don't find a method of avoiding it---- and no I won't be giving it away
Thanks
Paul

Jegersmart

We have no idea what your circumstances are of course, but it would perhaps be an idea to see an IFA (fee based) to see how to minimise your tax liability. I presume you have pension provisions? Depending on the amount you are looking to invest there may be other doors open to you?

J

PaulCooper

I have reasonable pension provisions, all in a SIPP, unfortunately the government have just reduced the amount that can be taken out, so I probably won't put any more into it. I may well seek the advice of an IFA, but I hate entering a conversation where the dice are 100% loaded in their favour, i.e. I know nothing. I realise there are a few IFAs that contribute to posts here, so maybe they can point me in a direction. Although my prime question relates to the maturity value of a bond, is it classed as a Capital Gain?

Jegersmart

I am not sure it is very simple, but google yields this:

Taxation of Zero-Coupon Bonds
Despite the fact that they have no stated coupon rate, zero-coupon investors must report a prorated portion of interest each year as income, even though it has not been paid out. Zeros are issued at a discount and mature at par, and the amount of the spread is divided equally among the number of years to maturity and taxed as interest, just as any other original issue discount bond. (For related reading, see Weighing The Tax Benefits Of Municipal Securities.)

from:
http://www.investopedia.com/articles/tax/08/bond-tax.asp

Do you not know an IFA that is used by your friends/peers/colleagues? If they are a fee-based advisor then you pay for the time you use and he would not be incentivised to recommend expensive investments because he is not icentivised through comission? Dice being loaded in their favour? Well, if they are genuine and you can get one with a referral from soneone you trust they should have the same goal as you......?

HTH

J

Jegersmart

Additionally, there are other asset classes and vehciles than bonds - you may want to take a look a those.

J

crittertog

PaulCooper wrote: »

I may well seek the advice of an IFA, but I hate entering a conversation where the dice are 100% loaded in their favour, i.e. I know nothing...Although my prime question relates to the maturity value of a bond, is it classed as a Capital Gain?

As it's a straightforward question, why not ask HMRC?

Reaper

It sounds like you are after zero dividend preference shares from a split capital investment trust. You will have to do some reading first though to make sure you understand the risks and it is what you are after.

Alternatively, depending on your attitude to risk, there tax efficient ways of investing beyond ISAs such as VCT, EIS, and the new SEIS.

PaulCooper

Thanks all, I got the plot
Paul