Why don't gilts attract CGT?

wmb194

Ciprico said:

Is there a technical reason ? or could a govt change this policy on a whim...?

Not just gilts, most corporate bonds as well. See my post above this.

zagfles

wmb194 said:

InvesterJones said:

Ciprico said:

Is there a technical reason ? or could a govt change this policy on a whim...?

I presume that'd be a route for people to pay above par at issuance, get all the benefit from the coupons, then redeem at par and then be able to bank a capital loss.

Yes. In the right circumstances you could also buy way above par in the secondary market and then manufacture a capital loss whilst making an overall profit with the coupons. 

At the moment it's hard to find good examples now that everything's close to par but for instance TR21 8% used to trade way above par. It would have been like falling off a log to lock in a guaranteed positive YTM and a stonking capital loss to use against e.g., gains from your equities.

In which case there must be an even bigger "stonking" amount of taxable interest. Generally capital gains are taxed less heavily than income tax. So for most people replacing capital gains with interest would mean more tax payable, not less.

There may be niche circumstances where converting capital gains to interest is of benefit eg someone using the savings starting rate, but I can't believe there are that many people on low incomes who could and would be able to exploit such a loophole. 

InvesterJones

zagfles said:

wmb194 said:

InvesterJones said:

Ciprico said:

Is there a technical reason ? or could a govt change this policy on a whim...?

I presume that'd be a route for people to pay above par at issuance, get all the benefit from the coupons, then redeem at par and then be able to bank a capital loss.

Yes. In the right circumstances you could also buy way above par in the secondary market and then manufacture a capital loss whilst making an overall profit with the coupons. 

At the moment it's hard to find good examples now that everything's close to par but for instance TR21 8% used to trade way above par. It would have been like falling off a log to lock in a guaranteed positive YTM and a stonking capital loss to use against e.g., gains from your equities.

In which case there must be an even bigger "stonking" amount of taxable interest. Generally capital gains are taxed less heavily than income tax. So for most people replacing capital gains with interest would mean more tax payable, not less.

There may be niche circumstances where converting capital gains to interest is of benefit eg someone using the savings starting rate, but I can't believe there are that many people on low incomes who could and would be able to exploit such a loophole. 

That the interest is taxable doesn't matter - there isn't any compensation for negative interest rates (should such a thing ever happen), but capital losses can be set against capital gains.

boingy

Bobziz said:

boingy said:

Ask the question again after the budget! 

Not sure a government that is looking to raise money would seek to make lending to it less attractive 🤔

You're assuming a government with common sense and forethought. I can't remember ever having one of those. 

wmb194

zagfles said:

wmb194 said:

InvesterJones said:

Ciprico said:

Is there a technical reason ? or could a govt change this policy on a whim...?

I presume that'd be a route for people to pay above par at issuance, get all the benefit from the coupons, then redeem at par and then be able to bank a capital loss.

Yes. In the right circumstances you could also buy way above par in the secondary market and then manufacture a capital loss whilst making an overall profit with the coupons. 

At the moment it's hard to find good examples now that everything's close to par but for instance TR21 8% used to trade way above par. It would have been like falling off a log to lock in a guaranteed positive YTM and a stonking capital loss to use against e.g., gains from your equities.

In which case there must be an even bigger "stonking" amount of taxable interest. Generally capital gains are taxed less heavily than income tax. So for most people replacing capital gains with interest would mean more tax payable, not less.

There may be niche circumstances where converting capital gains to interest is of benefit eg someone using the savings starting rate, but I can't believe there are that many people on low incomes who could and would be able to exploit such a loophole. 

People do buy gilts for the coupon. I even owned TR21. A guaranteed capital loss to use however I pleased would have been the cherry on top. It's not individuals on low incomes the Treasury is worried about, it's funds and companies with deep pockets.

zagfles

InvesterJones said:

zagfles said:

wmb194 said:

InvesterJones said:

Ciprico said:

Is there a technical reason ? or could a govt change this policy on a whim...?

I presume that'd be a route for people to pay above par at issuance, get all the benefit from the coupons, then redeem at par and then be able to bank a capital loss.

Yes. In the right circumstances you could also buy way above par in the secondary market and then manufacture a capital loss whilst making an overall profit with the coupons. 

At the moment it's hard to find good examples now that everything's close to par but for instance TR21 8% used to trade way above par. It would have been like falling off a log to lock in a guaranteed positive YTM and a stonking capital loss to use against e.g., gains from your equities.

In which case there must be an even bigger "stonking" amount of taxable interest. Generally capital gains are taxed less heavily than income tax. So for most people replacing capital gains with interest would mean more tax payable, not less.

There may be niche circumstances where converting capital gains to interest is of benefit eg someone using the savings starting rate, but I can't believe there are that many people on low incomes who could and would be able to exploit such a loophole. 

That the interest is taxable doesn't matter - there isn't any compensation for negative interest rates (should such a thing ever happen), but capital losses can be set against capital gains.

Why doesn't it matter? You reduce CGT and instead increase income tax. Doesn't sound like a good plan when income tax rates are generally higher than CGT rates. 

zagfles

wmb194 said:

zagfles said:

wmb194 said:

InvesterJones said:

Ciprico said:

Is there a technical reason ? or could a govt change this policy on a whim...?

I presume that'd be a route for people to pay above par at issuance, get all the benefit from the coupons, then redeem at par and then be able to bank a capital loss.

Yes. In the right circumstances you could also buy way above par in the secondary market and then manufacture a capital loss whilst making an overall profit with the coupons. 

At the moment it's hard to find good examples now that everything's close to par but for instance TR21 8% used to trade way above par. It would have been like falling off a log to lock in a guaranteed positive YTM and a stonking capital loss to use against e.g., gains from your equities.

In which case there must be an even bigger "stonking" amount of taxable interest. Generally capital gains are taxed less heavily than income tax. So for most people replacing capital gains with interest would mean more tax payable, not less.

There may be niche circumstances where converting capital gains to interest is of benefit eg someone using the savings starting rate, but I can't believe there are that many people on low incomes who could and would be able to exploit such a loophole. 

People do buy gilts for the coupon. I even owned TR21. A guaranteed capital loss to use however I pleased would have been the cherry on top. It's not individuals on low incomes the Treasury is worried about, it's funds and companies with deep pockets.

Obviously people buy gilts for the coupon. That's not the point. The point is the coupon is taxable income. You seem to be suggesting that there is some big tax advantage to reducing the amount you're assessed for CGT on while increasing the amount you are charged income tax on by more. 

Would make sense if capital gains were taxed more heavily than income. But that's not the case at the moment. And why many people are now doing the exact opposite, ie buying low coupon gilts below par so they're replacing interest with a capital gain. 

masonic

I don't understand why someone would want to manufacture a loss to avoid paying 10-28% tax on the offset gain. Isn't 72-90% of something better than 100% of nothing? Would take a very hefty taxable coupon to make this deliver a higher overall return after factoring in the opportunity cost of using the capital in this way.

InvesterJones

It's the same argument in favour of using CG loss to offset a gain elsewhere. Yes, you'd pay a little more tax on the interest instead, but in return, you'd avoid CGT on TWO lots of capital (the gilt, and the gain you're offsetting elsewhere).

GeoffTF

zagfles said:

InvesterJones said:

Hoenir said:

InvesterJones said:

Ciprico said:

Is there a technical reason ? or could a govt change this policy on a whim...?

I presume that'd be a route for people to pay above par at issuance, get all the benefit from the coupons, then redeem at par and then be able to bank a capital loss.

At issuance why would investors want to guarantee a capital loss? 

To get the coupon payments.

Which are taxable as interest, so what circumstances would this make financial sense? There be some obscure ones but generally it won't make sense from a taxation POV to get a high taxable interest with a capital loss even if it offset capital gains. 

Perhaps you are retired and waiting for your pensions to be paid. You can fill your entire Personal Allowance, Starting Rate for Savings and Personal Savings Allowance before paying tax on savings interest. You may also have shares that are showing a healthy capital gain. Gilts have been exempt from Capital Gains Tax since 1986:

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg54900

"Since 2 July 1986 all disposals of gilt-edged securities have been exempt from Capital Gains Tax, TCGA92/S115 (1)(a)."

That exemption would have been less generous when capital gains were indexed. There have been scare stories about almost every possible means of raising more tax, but this one seems to have slipped through the net. Nonetheless, nobody predicted that the Winter Fuel Allowance would be means tested either.