Qualifying corporate bonds

ed_avis

According to a guide on the Interactive Investor site (sorry, can't link directly) it is only if bought directly from the issuer that QCBs are exempt from capital gains tax.  I don't know who is correct, but such a rule would seem to make sense from HMRC's perspective.  If you could buy a bond at a heavily discounted price (perhaps because the issuer's credit quality has deteriorated) but then hold it to maturity and be paid back at face value (assuming you made a good bet and the issuer didn't go bust), then that would be a big tax-free gain.  Which sounds too good to be true.

That would explain why many guides to this area of tax law talk mostly about losses, and the fact that selling a QCB at a lower price does not generate a capital loss which can be offset against gains for CGT.

It also would be consistent with the rules about deeply discounted securities.  They are also trying to make sure you cannot buy below face value and get a CGT-free profit from the price converging towards face value as maturity approaches.

poseidon1

wmb194 said:

Hoenir said:

wmb194 said:

Hoenir said:

Corporate Bonds are generally traded in a very thin market. You'd struggle to buy without placing an order and waiting for someone to match the trade. 

The ORB retail bonds have market makers. It was deliberately set-up this way in an attempt to ensure liquidity. Originally there were meant to be at least three per bond but the number may have shrunk.

There's only liquidity if there's stock being actively traded. Corporate bonds tend to be bought and held. 

Volumes in some equities are far lower than people imagine. In 2022 some 90% of global equity trading was conducted in just 110 stocks. Whereas in total there were some 60,000 public listed companies. 

ORB bonds have market makers, they hold stock. For modest amounts I've never had any trouble dealing in them instantly.

Same here, been buying and selling ORBs since 2014. 

The situation now is the number has shrunk significantly, with redemptions not replaced by new issues. Currently holding a couple from very niche companies ( Burford and International Personal Finance). Very familiar with both businesses and have held different bonds from both companies over the last 7 years,  but I would struggle to recommend them to newbie bond investors in view of their niche business profiles.

In any event corporate bonds are classified as complex investments by the larger platforms such as HL and ii, requiring prospective investors to pass a test to prove their competence as 'sophisticated investors ' ( not especially difficult!).

ORBs stood me in very good stead during the long period of near zero bank interest rates, so their slow demise is lamented.

poseidon1

ed_avis said:

According to a guide on the Interactive Investor site (sorry, can't link directly) it is only if bought directly from the issuer that QCBs are exempt from capital gains tax.  I don't know who is correct, but such a rule would seem to make sense from HMRC's perspective.  If you could buy a bond at a heavily discounted price (perhaps because the issuer's credit quality has deteriorated) but then hold it to maturity and be paid back at face value (assuming you made a good bet and the issuer didn't go bust), then that would be a big tax-free gain.  Which sounds too good to be true.

That would explain why many guides to this area of tax law talk mostly about losses, and the fact that selling a QCB at a lower price does not generate a capital loss which can be offset against gains for CGT.

It also would be consistent with the rules about deeply discounted securities.  They are also trying to make sure you cannot buy below face value and get a CGT-free profit from the price converging towards face value as maturity approaches.

You seem to have misinterpreted the CGT position for QCBs. interactive Investors short explanation of the cgt position ( see extract below ) does not support your contention:

''  What are the tax rules for corporate bonds

Capital gains tax

Most corporate bonds bought directly and issued in pounds, so long as they are deemed “qualifying corporate bonds” by HMRC and are held outside an ISA, are free from capital gains tax or CGT. 

This means someone buying and selling a bond, and making money on the trade, will not pay tax on their profits. "

 

Suggest you have a read of HMRC's manual on the subject ( see link  below). CGT treatment of QCBs is the same as gilts, and you will note even trading in corporate bond options ( rather than the bond itself ) any gain on the option is cgt exempt.

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg53703

As regards deeply discounted securities ( ie bonds that were discounted when first issued ) they are also QCBs and similarly cgt exempt. The difference with these distinctive QCBs is any gain on sale or redemption is treated as taxable income liable to income tax.

An ordinary QCB originally issued at par does not become a deeply discounted bond simply because at some point in its life its market value falls below its original issued face value, so any gain one would make it that scenario does not lead the bond to become subject to the income tax rules appertaining to deeply discounted bonds, the gain remains exempt.

The flip side of this of course, are any losses on sale or because the business goes bust and defaults on the loan, are disallowed in their entirety. No different from making a capital loss on a standard gilt, where similarly losses are disallowed.

My previous post mentioned that the investment platforms consider corporate bonds as complex and not automatically available to trade by their retail customers, without further 'qualification'. The tax treatments of various categories of corporate bonds is likely part of the reason.

InvesterJones

ed_avis said:

According to a guide on the Interactive Investor site (sorry, can't link directly) it is only if bought directly from the issuer that QCBs are exempt from capital gains tax.  I don't know who is correct, but such a rule would seem to make sense from HMRC's perspective.  If you could buy a bond at a heavily discounted price (perhaps because the issuer's credit quality has deteriorated) but then hold it to maturity and be paid back at face value (assuming you made a good bet and the issuer didn't go bust), then that would be a big tax-free gain.  Which sounds too good to be true.

Sounding too good to be true doesn't automatically disqualify it The position with gilts for example is exactly as you describe - if they start trading at a discount (because interest rates have increased above the coupon value, say) then you indeed get the capital gain on redemption (or any other time) free of CGT. Gilts maturing in ~25yrs can be currently picked up well below £40 and all of the gain on £100 redemption is CGT free.