Why don't gilts attract CGT?

zagfles

InvesterJones said:

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).

This is getting silly. You don't make a capital gain on the gilt, you make a capital loss! So no CGT would ever have been due on the gilt anyway!

If the capital loss on the gilt is £5000 and you've made a £5000+ gain elsewhere, you might pay CGT on £5000 less. One lot. 

OTOH, assuming a positive YTM, then you'd get over £5000 in taxable interest. You would pay more tax, unless there's some niche circumstances where you get taxed less heavily on income than capital gains. 

I can see it possibly working if you're faced with a big CGT bill for a large indivisible asset, for instance a second home. If you've made a £200k capital gain on a house you intend to sell in a few years, it'd push you into the higher tax bands. So you might want to spread the tax over a few years, so buy a high coupon gilt way above par and taking taxable income spread over a few years might be better than CGT in one year. 

But it wouldn't apply to shares etc as you could simply spread the sell over a few years. 

wmb194

GeoffTF said:

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. 

You may currently have no UK taxable income, so that you can fill your entire Personal Allowance, Starting Rate for Savings and Personal Savings Allowance. You may also have shares that have a healthy capital gain. I do not expect that would be a common situation though. 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.

There's some discussion in Parliament of it here, from Hansard:

"...That will have the desirable consequence of simplifying the scope of the tax, but the main reason underlying the new clause is that there has been a certain asymmetry, because gilt-edged securities and corporate bonds have not been within the charge to capital gains tax if they have been held for more than 12 months, and it has been found increasingly that those who wish to take a loss on such securities have disposed of them within 12 months and those who wish to take a profit have disposed of them outside 12 months. If follows, therefore, that the Inland Revenue has been conceding losses for tax purposes, but has not been recovering capital gains tax on disposals.

...

The Financial Times said: The main victims of the abolition of the tax on gilts will be the insurance companies. They are the largest group of gilt investors, owning nearly 30 per cent. of outstanding stock. For every one of the last 16 years they have been able to cut their total capital gains tax … bill by generating capital losses on their holdings of gilts.

https://api.parliament.uk/historic-hansard/commons/1985/jul/09/exemption-for-gilt-edged-securities-and

saajan_12

InvesterJones said:

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).

No, cos you're paying income tax on one "lot" of capital as the coupons have to make up for the capital loss on the gilt. 

Say you've used up all allowances and are in higher rate bands for simplicity. 
You had 10k of capital gains elsewhere -> Normally 20% CGT = -2k, Net profit = 8k

If you had 10k of capital gains elsewhere and also buy gilts 10k above par, with a 10k coupon over that time. -> You end up with a 10k capital loss which offsets the and 10k capital gain, and a 10k income taxed at 40%, ie -4k. Net profit = 6k

Hoenir

wmb194 said:

GeoffTF said:

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. 

You may currently have no UK taxable income, so that you can fill your entire Personal Allowance, Starting Rate for Savings and Personal Savings Allowance. You may also have shares that have a healthy capital gain. I do not expect that would be a common situation though. 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.

There's some discussion in Parliament of it here, from Hansard:

"...That will have the desirable consequence of simplifying the scope of the tax, but the main reason underlying the new clause is that there has been a certain asymmetry, because gilt-edged securities and corporate bonds have not been within the charge to capital gains tax if they have been held for more than 12 months, and it has been found increasingly that those who wish to take a loss on such securities have disposed of them within 12 months and those who wish to take a profit have disposed of them outside 12 months. If follows, therefore, that the Inland Revenue has been conceding losses for tax purposes, but has not been recovering capital gains tax on disposals.

...

The Financial Times said: The main victims of the abolition of the tax on gilts will be the insurance companies. They are the largest group of gilt investors, owning nearly 30 per cent. of outstanding stock. For every one of the last 16 years they have been able to cut their total capital gains tax … bill by generating capital losses on their holdings of gilts.

https://api.parliament.uk/historic-hansard/commons/1985/jul/09/exemption-for-gilt-edged-securities-and

An overnight change in taxation sounds like a Liz Truss moment.  The FT wouldn't make such a statement without providing far greater context. The last 16 years of course spans the post GFC / QE era. Which has past. 

wmb194

Hoenir said:

wmb194 said:

GeoffTF said:

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. 

You may currently have no UK taxable income, so that you can fill your entire Personal Allowance, Starting Rate for Savings and Personal Savings Allowance. You may also have shares that have a healthy capital gain. I do not expect that would be a common situation though. 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.

There's some discussion in Parliament of it here, from Hansard:

"...That will have the desirable consequence of simplifying the scope of the tax, but the main reason underlying the new clause is that there has been a certain asymmetry, because gilt-edged securities and corporate bonds have not been within the charge to capital gains tax if they have been held for more than 12 months, and it has been found increasingly that those who wish to take a loss on such securities have disposed of them within 12 months and those who wish to take a profit have disposed of them outside 12 months. If follows, therefore, that the Inland Revenue has been conceding losses for tax purposes, but has not been recovering capital gains tax on disposals.

...

The Financial Times said: The main victims of the abolition of the tax on gilts will be the insurance companies. They are the largest group of gilt investors, owning nearly 30 per cent. of outstanding stock. For every one of the last 16 years they have been able to cut their total capital gains tax … bill by generating capital losses on their holdings of gilts.

https://api.parliament.uk/historic-hansard/commons/1985/jul/09/exemption-for-gilt-edged-securities-and

An overnight change in taxation sounds like a Liz Truss moment.  The FT wouldn't make such a statement without providing far greater context. The last 16 years of course spans the post GFC / QE era. Which has past. 

Did you follow the link? Find the article, its  just an extract quoted in Parliament. It’s from 1985 so those 16 years began in 1969. It sounds like a change that was rushed through after an MP brought it up.

GeoffTF

Hoenir said:

wmb194 said:

GeoffTF said:

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. 

You may currently have no UK taxable income, so that you can fill your entire Personal Allowance, Starting Rate for Savings and Personal Savings Allowance. You may also have shares that have a healthy capital gain. I do not expect that would be a common situation though. 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.

There's some discussion in Parliament of it here, from Hansard:

"...That will have the desirable consequence of simplifying the scope of the tax, but the main reason underlying the new clause is that there has been a certain asymmetry, because gilt-edged securities and corporate bonds have not been within the charge to capital gains tax if they have been held for more than 12 months, and it has been found increasingly that those who wish to take a loss on such securities have disposed of them within 12 months and those who wish to take a profit have disposed of them outside 12 months. If follows, therefore, that the Inland Revenue has been conceding losses for tax purposes, but has not been recovering capital gains tax on disposals.

...

The Financial Times said: The main victims of the abolition of the tax on gilts will be the insurance companies. They are the largest group of gilt investors, owning nearly 30 per cent. of outstanding stock. For every one of the last 16 years they have been able to cut their total capital gains tax … bill by generating capital losses on their holdings of gilts.

https://api.parliament.uk/historic-hansard/commons/1985/jul/09/exemption-for-gilt-edged-securities-and

An overnight change in taxation sounds like a Liz Truss moment.  The FT wouldn't make such a statement without providing far greater context. The last 16 years of course spans the post GFC / QE era. Which has past. 

That is a quotation from 1985 Hansard. The 16 years in question runs from 1969 to 1985. Liz Truss would have been aged 10 at the end of that period. The change in taxation in 1985 was not particularly radical. Gilts were already free of CGT provided that they had been held for at least 12 months.

Linton

I cannot see anyone else has made this point, sorry if I miissed it...

Given that standard gilts start with a capital value of £100 and are redeemed at a capital value of £100 any capital gains by one person will be balanced by capital losses for someone else.  So broadly speaking a zero net gain to the treasury were CGT to be charged.

GeoffTF

Linton said:

I cannot see anyone else has made this point, sorry if I miissed it...

Given that standard gilts start with a capital value of £100 and are redeemed at a capital value of £100 any capital gains by one person will be balanced by capital losses for someone else.  So broadly speaking a zero net gain to the treasury were CGT to be charged.

Gilts are sold by auction, both when the original tranche is sold and when subsequent tranches of the same issue are sold. The original tranche is usually sold at near 100, but later tranches may deviate more significantly. Nonetheless, your point remains. The overall capital gain will not usually be much. If such a measure were introduced, it would be to take advantage of the current situation where many gilts are trading well under par. I have no doubt that there would be a chorus of people crying foul: the government would be taxing gains after not allowing tax relief for losses. As has already been said, it would also discourage UK tax payers from lending money to the government, and make it more reliant on borrowing money from foreigners.

zagfles

wmb194 said:

GeoffTF said:

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. 

You may currently have no UK taxable income, so that you can fill your entire Personal Allowance, Starting Rate for Savings and Personal Savings Allowance. You may also have shares that have a healthy capital gain. I do not expect that would be a common situation though. 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.

There's some discussion in Parliament of it here, from Hansard:

"...That will have the desirable consequence of simplifying the scope of the tax, but the main reason underlying the new clause is that there has been a certain asymmetry, because gilt-edged securities and corporate bonds have not been within the charge to capital gains tax if they have been held for more than 12 months, and it has been found increasingly that those who wish to take a loss on such securities have disposed of them within 12 months and those who wish to take a profit have disposed of them outside 12 months. If follows, therefore, that the Inland Revenue has been conceding losses for tax purposes, but has not been recovering capital gains tax on disposals.

...

The Financial Times said: The main victims of the abolition of the tax on gilts will be the insurance companies. They are the largest group of gilt investors, owning nearly 30 per cent. of outstanding stock. For every one of the last 16 years they have been able to cut their total capital gains tax … bill by generating capital losses on their holdings of gilts.

https://api.parliament.uk/historic-hansard/commons/1985/jul/09/exemption-for-gilt-edged-securities-and

Well that makes sense then, and probably explains why there's this myth that introducing CGT on gilts could be used as a tax dodge. The obvious dodge above was due to asymmetrical tax treatment of holdings over 12 months compared to holdings under 12 months.

Instead of eg holding a gilt at par paying the prevailing interest rate eg 4%, you split it into two holdings of low coupon gilts paying say 2%, which you'd make a capital gain on, and high coupon gilts paying say 6%, which you'd make a capital loss on. You'd make the exact same amount of taxable interest, and the capital gain on the 2% gilts would cancel the capital loss on the 6%. All neutral so far. 

But then all you need to do is sell the high coupon gilts every 11 months and rebuy, possibly a different gilt to avoid B&B rules but a similar high coupon one.  So you generate a CGT loss which you can use to offset capital gains on other investments, but you pay no CGT on the gains from the low coupon gilts because you hold them for more than 12 months. 

But if the govt simply introduced CGT on gilts (regardless of holding length) there would be no tax loophole like above. 

OldScientist

Linton said:

I cannot see anyone else has made this point, sorry if I miissed it...

Given that standard gilts start with a capital value of £100 and are redeemed at a capital value of £100 any capital gains by one person will be balanced by capital losses for someone else.  So broadly speaking a zero net gain to the treasury were CGT to be charged.

Except for later tranches (as mentioned above), the other exception to this is inflation linked gilts where the redemption value is not £100 nominal (although it is £100 real). 

For retail holders, there would be a slight asymmetry in tax from the treasury point of view (because of the CGT threshold), but this is likely to be small. In other words, I think you are correct that gilts are CGT neutral from a government perspective.