Apparent large loss after buying index linked gilt

Lowtrawler

incus432 said:

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.

Only the coupon is interest, anything else is a capital movement. On 12,941.15 units, you will earn and receive £8.08 + indexation on the coupon every 6 months. As you purchased the units with £6.34 of accrued interest, when you receive your first coupon, only the £8.08 + indexation on the coupon less £6.34 will be treated as taxable interest income. Any other movement is a capital movement.

You can see the current indexation on the DMO page (it gets updated daily):

https://www.dmo.gov.uk/data/pdfdatareport?reportCode=D1D

As at today, the indexation ratio for your bond is 1.55033 meaning the expected interest (for you) at the next payment date if inflation is zero to next coupon date is 12,941.15 x 0.125% x 6/12 x 1.55033 = £12.54 and you would have taxable interest income of £6.20 = £12.54 less £6.34 at the next coupon date

You can get a rough approximation of your current market price by multiplying the clean price by the indexation ratio. Using your screenshot as an example, you have a clean price of 99.30p and so the price including indexation is 99.30p x 1.55033 = 153.9478p. To be completely accurate, you then need to add the accrued interest to get to the correct dirty price.

incus432

DRS1 said:

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.

Many thanks. I have emailed Iweb asking why they display this perplexing (and misleading) way. Will see if I get a response. 

Lowtrawler

incus432 said:

DRS1 said:

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.

Many thanks. I have emailed Iweb asking why they display this perplexing (and misleading) way. Will see if I get a response. 

iWeb, Interactive Investor and Hargreaves Lansdown all do the same thing. They all receive a price feed which shows the clean price and so this is what they use. It means you get a price that excludes indexation. When you come to trade the gilt, it will be priced correctly - including indexation and accrued interest.

You can either manually adjust the price shown using the DMO link I posted above or using the correct dirty price shown on https://giltsyield.com/bond/inflation/

As I understand it, the feed they use is the official stock exchange prices and they have not implemented any solution to display the correct indexed prices. In most cases, this will have no impact other than to make you appear to be nursing large losses where there are none. For index linked gilts, the clean price can be converted into the dirty price using the DMO data. The inaccurate pricing only presents an issue when your portfolio needs to be accurately valued e.g. for probate or when, within a SIPP, you wish to take a PCLS. For probate, this might present a benefit for inheritance tax avoidance. Within a SIPP, it will detrimentally impact the PCLS.

incus432

This is the reply from Iweb (they, Halifax and Lloyds all use the same system) . They are 'looking into' changing it.  Clearly AJ Bell have managed it. 

Displaying an apparent huge loss may not have any real effect -except on one's heart rate -  but it is not user-friendly, and does nothing to dispel the image of gilt investment as being difficult and arcane

Lowtrawler

incus432 said:

This is the reply from Iweb (they, Halifax and Lloyds all use the same system) . They are 'looking into' changing it.  Clearly AJ Bell have managed it. 

Displaying an apparent huge loss may not have any real effect -except on one's heart rate -  but it is not user-friendly, and does nothing to dispel the image of gilt investment as being difficult and arcane

Someone pointed you towards my other thread where I have raised a complaint with the Ombudsman on SIPP valuation when taking the PCLS. If the ombudsman finds in my favour, it could be they will be forced to change how they value Index-Linked gilts.

JoeCrystal

Mind you, they may decide in the end that the cost to show the correct value would be too much hassle and expensive and just remove the options altogether.

SnowMan

incus432 said:

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.

You must have bought TR26 on Thursday for the accrued interest to be £6.34 (as 93/184 x 0.00125 x 0.5 x 1.55033 x 12941.15 = 6.34)

If you sold it tomorrow (24th), it would settle on 26th June (as iweb work on a T+2 settlement basis for ILGs) the accrued interest would then be £6.55 (96/184 x 0.00125 x 0.5 x 1.553 x 12941.15).

So you would have 21 pence of taxable interest (6.55 - 6.34). And that would be the only thing subject to tax.

The dirty price is around £154 at the moment as you say, and the dirty price (i.e. the price including accrued interest and indexation) would be what would be used to calculate your sale proceeds if you did sell. So you would get back roughly what you paid. 

I wouldn't rush into doing anything. You have a perfectly reasonable investment there, although of course it's your call. The actual taxable interest if you hold to maturity is very small also (as has been pointed out above) and that will be the only taxable income if you do hold.

By the way there's a great article on monevator on all the issues that you encounter when buying an index linked gilt.

https://monevator.com/how-to-buy-index-linked-gilts/

incus432

SnowMan said

You must have bought TR26 on Thursday for the accrued interest to be £6.34 (as 93/184 x 0.00125 x 0.5 x 1.55033 x 12941.15 = 6.34)

If you sold it tomorrow (24th), it would settle on 26th June (as iweb work on a T+2 settlement basis for ILGs) the accrued interest would then be £6.55 (96/184 x 0.00125 x 0.5 x 1.553 x 12941.15).

So you would have 21 pence of taxable interest (6.55 - 6.34). And that would be the only thing subject to tax.

The dirty price is around £154 at the moment as you say, and the dirty price (i.e. the price including accrued interest and indexation) would be what would be used to calculate your sale proceeds if you did sell. So you would get back roughly what you paid. 

I wouldn't rush into doing anything. You have a perfectly reasonable investment there, although of course it's your call. The actual taxable interest if you hold to maturity is very small also (as has been pointed out above) and that will be the only taxable income if you do hold.

By the way there's a great article on monevator on all the issues that you encounter when buying an index linked gilt.

https://monevator.com/how-to-buy-index-linked-gilts/

Thanks for that. Yes I have got my head round it now so holding on, and will fill in the tax return section next year.  It's clearly is a low amount-  which is what I intended in buying the low coupon. Previously i've held all gilts in SIPPs and ISAs so not had to do that till now

Lowtrawler

JoeCrystal said:

Mind you, they may decide in the end that the cost to show the correct value would be too much hassle and expensive and just remove the options altogether.

It's possible, but it would take any decent coder less than a day to write a script converting the clean price to a dirty price. It would also give them a headache on how to treat those customers already holding IL Gilts.

leosayer

Lowtrawler said:

JoeCrystal said:

Mind you, they may decide in the end that the cost to show the correct value would be too much hassle and expensive and just remove the options altogether.

It's possible, but it would take any decent coder less than a day to write a script converting the clean price to a dirty price. It would also give them a headache on how to treat those customers already holding IL Gilts.

If I was asked for produce a 'finger in the air' estimate for a platform to make such a change, I would want to allow 30-40 days effort. If the system is supported by third parties then the cost is likely to be in 6 figures.

In fact, I'd be surprised if they don't already have the requirement on a backlog and given those numbers it would take some serious regulatory or client pressure to get it implemented. This is why complaining is so important as long as it doesn't make the service worse.