Apparent large loss after buying index linked gilt

Hoenir

The previously accrued interest is deductible in the same tax tax year as the next coupon is paid, i.e. a net interest figure is declared. Same principle applies to UK Gilts and other forms of bond instruments. There'll be an element of accrued interest in the purchase price. This is clearly detailed on the purchase contract note. Likewise when you sell the reverse will apply. As the seller is entitled to the accrued interest to date.  This interest has to be declared as income (if applicable). 

SnowMan

incus432 said:

SnowMan said:

The dirty price that you paid takes into account that you are not just buying £100 nominal of the TR26 but you are also buying the indexation (i.e. RPI increase) that has already taken place from when it was issued in July 2015 until now. This diagram shows this (based on yesterday's official closing price and assumed settlement today)

When the ILG matures on 22/3/2026 you will get back £154.68 per £100 nominal purchased adjusted for the change in RPI from now to 22nd March 2026 (lagged by 3 months), and you will get two interest payments (coupons) on 22/9/2025 and 22/3/2026. 

@snowman Can you clarify another point please? -  I am unclear about what portion of the proceeds is taxable. I know the coupon interest is but what about the previously accrued interest?

In relation to your purchase of TR26 and assuming that you hold to the redemption date:

You will pay income tax for 2025/26 on the coupon paid on 22/9/2025 less the accrued interest on purchase shown on your settlement note (see this info on gov.uk). That is what it means when it says

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.

You will pay income tax for 2025/2026 on the coupon paid on 22/3/2026

And the maturity proceeds paid on 22/3/2026 will not be subject to capital gains tax because maturity proceeds are exempt from capital gains tax for individuals.

incus432 said:

Thank you both for that. What I'm still struggling with is understanding is the price I will sell for at maturity (i know conventional gilts sell at 100) and if the only taxable element is the coupon interest on 22/3/26 minus the accrued interest stated on the settlement (which is what I take from your replies).   In other words is the gross accrued interest to now -for which I paid a 54p premium in my purchase  - not counted as taxable interest but a capital gain?  I assume that is because previous bond owners have been taxed on that already?

You are paying income tax on the coupon received on 22/9/2025 plus the coupon paid on 22/3/2026 less the accrued interest on purchase. The seller (assuming they are an individual) pays income tax on the accrued interest at purchase and you pay income tax on the balance of the coupon received on 22/9/2025. So between you you are taxed on the full 22/9/2025 coupon. And you pay income tax on the full 22/3/2026 coupon. You can think of your accrued interest on purchase as being returned as part of the coupon on 22/9/2025. 

incus432

Thank you both for that. What I'm still struggling with is understanding is the price I will sell for at maturity (i know conventional gilts sell at 100) and if the only taxable element is the coupon interest on 22/3/26 minus the accrued interest stated on the settlement (which is what I take from your replies).   In other words is the gross accrued interest to now -for which I paid a 54p premium in my purchase  - not counted as taxable interest but a capital gain?  I assume that is because previous bond owners have been taxed on that already?

Hoenir

incus432 said:

 In other words is the gross accrued interest to now -for which I paid a 54p premium in my purchase  - not counted as taxable interest but a capital gain? 

Interest is treated as being taxable income. 

Gains,  or indeed losses, on the capital values form part of the liability for CGT. 

SnowMan

incus432 said:

Thank you both for that. What I'm still struggling with is understanding is the price I will sell for at maturity (i know conventional gilts sell at 100) and if the only taxable element is the coupon interest on 22/3/26 minus the accrued interest stated on the settlement (which is what I take from your replies).   In other words is the gross accrued interest to now -for which I paid a 54p premium in my purchase  - not counted as taxable interest but a capital gain?  I assume that is because previous bond owners have been taxed on that already?

You pay income tax on the 22/9/2025 coupon less the accrued interest on purchase

And you pay income tax on the 22/3/2026 coupon.

You can think of the accrued interest on purchase as being returned as part of the 22/9/2025 coupon.

And thinking of it that way means your capital gain is the maturity amount less the clean price plus indexation (but excluding the accrued interest). Or expressing that another way the capital gain is the maturity amount less what you paid in total (clean + indexation + accrued interest) plus the accrued interest you paid.   

incus432

Having read that HMRC note I am starting to seriously regret buying these gilts in a GIA.  Sorting out the tax due looks like a nightmare.  I may look into selling before the next coupon and just putting the money in to a BS account.

coyrls

Hoenir said:

incus432 said:

 In other words is the gross accrued interest to now -for which I paid a 54p premium in my purchase  - not counted as taxable interest but a capital gain? 

Interest is treated as being taxable income. 

Gains,  or indeed losses, on the capital values form part of the liability for CGT. 

There is no laibilty for CGT with Gilts, index linked or not.

SnowMan

incus432 said:

Having read that HMRC note I am starting to seriously regret buying these gilts in a GIA.  Sorting out the tax due looks like a nightmare.  I may look into selling before the next coupon and just putting the money in to a BS account.

The HMRC note is trying to cover every eventuality. But it should be very straightforward. All you need to do is to put the coupons received in each tax year (net of the accrued interest on purchase if it's the first coupon payment after purchase) in box 3 of the additional information on your tax return (assuming you fill in a tax return). See this thread

https://forums.moneysavingexpert.com/discussion/6600091/where-to-declare-gilt-interest-coupons-on-self-assessment

If you sell you will still have to pay tax on accrued interest (accrued interest on sale less accrued interest on purchase, assuming there has been no coupon between purchase and sale) for the tax year when the next coupon would have been paid had the gilt not been sold. 

incus432

This is today's 'valuation' on iweb. 

I presume if I try to sell the actual price will be close to 154 not 99 although hard to check that. What is confiusing me is the idea of 'accrued interest' - I can see the small amount (£6.34) on the settlement doc but is not the apparent 7k loss also 'accrued interest' which I bought for the 54p premium and which will be subject to tax? Or are you saying the seller has already paid tax on that?

Sorry for the stupid question. I always said I would never invest in something I didn't understand but I sem to have done that.

DRS1

That £7k is not a loss in any sense of the word.  It is just a product of the weird way they show the value of the ILG.  Ignore it.

Nor is the £7k accrued interest.  So whatever you do don't put it in your tax return!

All you do with the accrued interest shown on the contract note is set it against the next interest payment you receive.  So if you get £10 interest you set off the £6.34 and you only pay income tax on £3.66 not the full £10.