Gilts Understanding

wmb194

Alex9384 said:

wmb194 said:

If your plan is to hold to maturity savings accounts are offering better rates, see below. It depends how much you're looking to deposit but you can find 5% to 6.25% instant access accounts e.g., Barclays Rainy Day Saver 5% on up to £5k plus various regular savers e.g., Lloyds Club £400pm 6.25%.

Club Lloyds monthly saver has gone down to 5.25% and max £250 per month now.

No, it hasn't. You're looking at the wrong account i.e. its other regular saver (you can have one of each at a time).

https://www.lloydsbank.com/savings/club-lloyds-monthly-saver.html

https://www.lloydsbank.com/savings/monthly-saver.html

ChilliBob

masonic said:

ChilliBob said:

What are the complexities I'm overlooking? (I saw PensionCraft video about buying Index Linkers and that being painful, but I thought simple gilts wouldn't be any more complex than buying an OEIC, ETF or share?)

The complexities are just that they aren't traded as easily as other investments and you have to be confident with the sums to make sure you are getting the deal you think you are when buying. It's very easy to misunderstand something and pick a bad deal, such as the high coupon above par gilt discussed upthread, or assume that strips are included in the tax-exempt CG status instruments without checking.

At the moment the situation is very fluid with both gilt yields and savings moving up week by week. If you have a large amount to invest and have already exhausted your PSA, then the tax saving can swing it for the low coupon gilts. However, wait a week or two and it can swing the other way.

If you wanted to have a £50k position in TN25, it may be worthwhile to buy in tranches.

That makes sense - thanks for clarifying. I suppose I thought the actual purchasing was what you were saying was tricky. I guess the point is it's finding what to buy is the tricky bit - as you say, the names are very similar, would be easy to get a gilt with a large coupon and small capital gain which totally defeats the object!

I've built what I think is a small Excel calculator now where I can plug in the price of TN25 vs the savings account I'm comparing to - at the moment it seems you'd need a fixed saver (without low £ restrictions etc) of about 6% to make it almost the same as TN25 - I'd not be surprised to see rates creep up a bit more, but 6% for a fix seems a bit of a jump at the moment. We shall see I guess.

I suppose the tax return gets marginally more complicated but I'm guessing for an accountant it's pretty trivial

ChilliBob

cwep2 said:

guli said:

how does £50k cost equals to £54k notional gilts wiht a 92.484 clean price?

For a Gilt that will pay £100 at maturity that costs £92.484 now (well £92.577 really), if I buy £50,000 notional now I will only pay £46,242 + accrued interest of £46.50 = £46,288.50 total. These are slightly rounded numbers for simplicity.

If I want to invest £50,000 now I need to buy more.
It's a slightly complex calculation to work out exactly how much you can buy as the price quoted is the clean price and you need to have enough funds to pay the dirty price - if you have exactly £50k in your account and you see the clean price quoted as 92.484 then you don't have enough money to buy £54,063 of gilts (= 50,000/0.92484) as you have forgotten to take into account accrued interest, you will also need to factor in dealing costs.

This clean/dirty price.. if I look on II I see this:
https://www.ii.co.uk/bonds/united-kingdom-025-31012025/LSE:TN25

So how does the clean/dirty side of things work then? - I can see it's about interest, so as I understand it if you purchased the day after the coupon was issues then clean and dirty are probably almost identical, if you purchased the day before then the prices would be at their widest difference?

In practice I'm not sure what that means if one was to purchase a trance of TN25 for example. It looks like you're saying you'd buy for X but then the broker would take X+y (where y is the dirty price difference)..... 

cwep2

ChilliBob said:

 This clean/dirty price.. if I look on II I see this:
https://www.ii.co.uk/bonds/united-kingdom-025-31012025/LSE:TN25

So how does the clean/dirty side of things work then? - I can see it's about interest, so as I understand it if you purchased the day after the coupon was issues then clean and dirty are probably almost identical, if you purchased the day before then the prices would be at their widest difference?

In practice I'm not sure what that means if one was to purchase a trance of TN25 for example. It looks like you're saying you'd buy for X but then the broker would take X+y (where y is the dirty price difference)..... 

Yes pretty much exactly this. With bigger coupons it makes more of a difference. It's done this way to make prices more comparable day to day but more to avoid big jumps in the price when coupons are paid which would make comparing them harder. Some places will show both prices, but if you only see one price it will be the clean price.

For this bond, since it has a coupon of 0.25% but paid twice a year, the dirty price adjustment will range from 0 to +0.125 onto the clean price over the 6 months between coupons, so roughly 0.0007 per day. Note the settlement for bonds is two days hence (T+2) so the dirty price goes up 0.0021 between Wednesday and Thursday. The exact maths of the "y" in your comment above is [(today+2 business days - date of last coupon) / (date of next coupon - date of last coupon) ] * coupon rate / number of times coupon is paid per year. Note that although the coupons are usually paid same dates per year, for this bond 31July and 31January, if these dates fall on a non working days they will need to be adjusted to the last working day of the month.

More importantly though, since you pay income/interest tax on the coupons, if you buy the bond the day before the coupon (using £50k = coupon of £62.50 paid twice a year) and you pay the dirty price including over £60 of accrued interest it would be unfair for you to pay tax on all of that £62.50 coupon - so you only pay on the coupon - the dirty price adjustment when you bought it. This is the key bit of info you may need to remember about the dirty price adjustment otherwise you'll pay to much tax.

Alex9384

wmb194 said:

Club Lloyds monthly saver has gone down to 5.25% and max £250 per month now.

No, it hasn't. You're looking at the wrong account i.e. its other regular saver (you can have one of each at a time).

https://www.lloydsbank.com/savings/club-lloyds-monthly-saver.html

https://www.lloydsbank.com/savings/monthly-saver.html

Thanks. That's interesting. I searched for Club Lloyds monthly saver at least twice over the last month, but couldn't find the 6.25% rate anymore.

aroominyork

cwep2 said:

ChilliBob said:

 This clean/dirty price.. if I look on II I see this:
https://www.ii.co.uk/bonds/united-kingdom-025-31012025/LSE:TN25

So how does the clean/dirty side of things work then? - I can see it's about interest, so as I understand it if you purchased the day after the coupon was issues then clean and dirty are probably almost identical, if you purchased the day before then the prices would be at their widest difference?

In practice I'm not sure what that means if one was to purchase a trance of TN25 for example. It looks like you're saying you'd buy for X but then the broker would take X+y (where y is the dirty price difference)..... 

More importantly though, since you pay income/interest tax on the coupons, if you buy the bond the day before the coupon (using £50k = coupon of £62.50 paid twice a year) and you pay the dirty price including over £60 of accrued interest it would be unfair for you to pay tax on all of that £62.50 coupon - so you only pay on the coupon - the dirty price adjustment when you bought it. This is the key bit of info you may need to remember about the dirty price adjustment otherwise you'll pay to much tax.

Is the point that on your self-assessment you deduct the accrued interest you pay at purchase from the first coupon payment, when calculating interest for tax purposes?

GeoffTF

aroominyork said:

cwep2 said:

ChilliBob said:

 This clean/dirty price.. if I look on II I see this:
https://www.ii.co.uk/bonds/united-kingdom-025-31012025/LSE:TN25

So how does the clean/dirty side of things work then? - I can see it's about interest, so as I understand it if you purchased the day after the coupon was issues then clean and dirty are probably almost identical, if you purchased the day before then the prices would be at their widest difference?

In practice I'm not sure what that means if one was to purchase a trance of TN25 for example. It looks like you're saying you'd buy for X but then the broker would take X+y (where y is the dirty price difference)..... 

More importantly though, since you pay income/interest tax on the coupons, if you buy the bond the day before the coupon (using £50k = coupon of £62.50 paid twice a year) and you pay the dirty price including over £60 of accrued interest it would be unfair for you to pay tax on all of that £62.50 coupon - so you only pay on the coupon - the dirty price adjustment when you bought it. This is the key bit of info you may need to remember about the dirty price adjustment otherwise you'll pay to much tax.

Is the point that on your self-assessment you deduct the accrued interest you pay at purchase from the first coupon payment, when calculating interest for tax purposes?

If you buy a security with accrued interest, the next interest payment that you receive will be taxable. But, because you’ve already paid an extra amount to buy the security, you can get tax relief under the Accrued Income Scheme. The extra amount you’ve paid is an ‘accrued income loss’. You deduct this from the interest that you get.

https://www.gov.uk/government/publications/accrued-income-scheme-hs343-self-assessment-helpsheet/hs343-accrued-income-scheme-2019

aroominyork

GeoffTF said:

aroominyork said:

cwep2 said:

ChilliBob said:

 This clean/dirty price.. if I look on II I see this:
https://www.ii.co.uk/bonds/united-kingdom-025-31012025/LSE:TN25

So how does the clean/dirty side of things work then? - I can see it's about interest, so as I understand it if you purchased the day after the coupon was issues then clean and dirty are probably almost identical, if you purchased the day before then the prices would be at their widest difference?

In practice I'm not sure what that means if one was to purchase a trance of TN25 for example. It looks like you're saying you'd buy for X but then the broker would take X+y (where y is the dirty price difference)..... 

More importantly though, since you pay income/interest tax on the coupons, if you buy the bond the day before the coupon (using £50k = coupon of £62.50 paid twice a year) and you pay the dirty price including over £60 of accrued interest it would be unfair for you to pay tax on all of that £62.50 coupon - so you only pay on the coupon - the dirty price adjustment when you bought it. This is the key bit of info you may need to remember about the dirty price adjustment otherwise you'll pay to much tax.

Is the point that on your self-assessment you deduct the accrued interest you pay at purchase from the first coupon payment, when calculating interest for tax purposes?

If you buy a security with accrued interest, the next interest payment that you receive will be taxable. But, because you’ve already paid an extra amount to buy the security, you can get tax relief under the Accrued Income Scheme. The extra amount you’ve paid is an ‘accrued income loss’. You deduct this from the interest that you get.

https://www.gov.uk/government/publications/accrued-income-scheme-hs343-self-assessment-helpsheet/hs343-accrued-income-scheme-2019

Very helpful. Also important that you must declare accrued interest if you sell between coupon dates.

masonic

aroominyork said:

GeoffTF said:

aroominyork said:

cwep2 said:

ChilliBob said:

 This clean/dirty price.. if I look on II I see this:
https://www.ii.co.uk/bonds/united-kingdom-025-31012025/LSE:TN25

So how does the clean/dirty side of things work then? - I can see it's about interest, so as I understand it if you purchased the day after the coupon was issues then clean and dirty are probably almost identical, if you purchased the day before then the prices would be at their widest difference?

In practice I'm not sure what that means if one was to purchase a trance of TN25 for example. It looks like you're saying you'd buy for X but then the broker would take X+y (where y is the dirty price difference)..... 

More importantly though, since you pay income/interest tax on the coupons, if you buy the bond the day before the coupon (using £50k = coupon of £62.50 paid twice a year) and you pay the dirty price including over £60 of accrued interest it would be unfair for you to pay tax on all of that £62.50 coupon - so you only pay on the coupon - the dirty price adjustment when you bought it. This is the key bit of info you may need to remember about the dirty price adjustment otherwise you'll pay to much tax.

Is the point that on your self-assessment you deduct the accrued interest you pay at purchase from the first coupon payment, when calculating interest for tax purposes?

If you buy a security with accrued interest, the next interest payment that you receive will be taxable. But, because you’ve already paid an extra amount to buy the security, you can get tax relief under the Accrued Income Scheme. The extra amount you’ve paid is an ‘accrued income loss’. You deduct this from the interest that you get.

https://www.gov.uk/government/publications/accrued-income-scheme-hs343-self-assessment-helpsheet/hs343-accrued-income-scheme-2019

Very helpful. Also important that you must declare accrued interest if you sell between coupon dates.

It would be interesting to know how much help people get via consolidated tax certificates from their investment provider for gilts.

aroominyork

masonic said:

aroominyork said:

GeoffTF said:

aroominyork said:

cwep2 said:

ChilliBob said:

 This clean/dirty price.. if I look on II I see this:
https://www.ii.co.uk/bonds/united-kingdom-025-31012025/LSE:TN25

So how does the clean/dirty side of things work then? - I can see it's about interest, so as I understand it if you purchased the day after the coupon was issues then clean and dirty are probably almost identical, if you purchased the day before then the prices would be at their widest difference?

In practice I'm not sure what that means if one was to purchase a trance of TN25 for example. It looks like you're saying you'd buy for X but then the broker would take X+y (where y is the dirty price difference)..... 

More importantly though, since you pay income/interest tax on the coupons, if you buy the bond the day before the coupon (using £50k = coupon of £62.50 paid twice a year) and you pay the dirty price including over £60 of accrued interest it would be unfair for you to pay tax on all of that £62.50 coupon - so you only pay on the coupon - the dirty price adjustment when you bought it. This is the key bit of info you may need to remember about the dirty price adjustment otherwise you'll pay to much tax.

Is the point that on your self-assessment you deduct the accrued interest you pay at purchase from the first coupon payment, when calculating interest for tax purposes?

If you buy a security with accrued interest, the next interest payment that you receive will be taxable. But, because you’ve already paid an extra amount to buy the security, you can get tax relief under the Accrued Income Scheme. The extra amount you’ve paid is an ‘accrued income loss’. You deduct this from the interest that you get.

https://www.gov.uk/government/publications/accrued-income-scheme-hs343-self-assessment-helpsheet/hs343-accrued-income-scheme-2019

Very helpful. Also important that you must declare accrued interest if you sell between coupon dates.

It would be interesting to know how much help people get via consolidated tax certificates from their investment provider for gilts.

Very interesting point. My Intervactive Investor consolidated tax certificate shows the gilt coupon paid on 31/1/23 but there is no mention of the accrued interest paid when the gilts were bought in September 2022.

The certificate shows the coupon income in a section grouped with unit trust dividends under a column headed "Dividends/Interest Paid". The next column is headed "Equalisation". It's a shame that isn't "Equalisation/Accrued interest".