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Where Taxpayers and Advisers Meet

Taxation of corporate bonds

fantavier
Posts:2
Joined:Sun Jul 10, 2022 4:49 pm
Taxation of corporate bonds

Postby fantavier » Sun Jul 10, 2022 5:10 pm

Hello,
I have a very basic question to which I can't find an answer. What UK tax applies to the gains made when I buy a bond and then sell later for a higher price (or it matures)? Let's say a simple corporate bond issued by Thames Water (https://cbonds.com/bonds/286365/), bought at 97%, which matures 2 years later and I receive 100% back. Any interest paid is obviously taxable at income tax, but what about the 3% gain? Is that taxed through CGT or through income tax? And does the answer depend on whether it is:

a) a UK government bond
b) a GBP corporate bond by a UK company
c) a USD (or other currency) bond?
d) bonds bought through an ETF (eg, an ETF with US government bonds)?

Does the issue of QCB (“qualifying corporate bond”) matter for this?

Many thanks in advance,

fantavier

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Taxation of corporate bonds

Postby AGoodman » Mon Jul 25, 2022 11:24 am

The example you give is just a simple capital gain and so, subject to allowances, would be subject to CGT.

I can refer you to some books on capital gains if you want to consider all four cases you mention...but generally it's CGT - there are specific rules for funds.

I believe QCB rules only really concern situations where you receive the QCB in exchange for shares.

fantavier
Posts:2
Joined:Sun Jul 10, 2022 4:49 pm

Re: Taxation of corporate bonds

Postby fantavier » Wed Aug 31, 2022 9:08 am

Hi,
Many thanks for the response, that answers my main question. But isn't that a bit of a loophole? Say I have a choice of two different bonds from the same issuer, each with 2 years remaining and a market yield of 5% per year.

- Bond A would have a 1% coupon and would thus be priced at about 92%.
- Bond B would have a 5% coupon and thus prices at about 100%.

Both would be pretty much identical leaving tax aside. But Bond A would mean a much lower tax burden for a typical UK investor who pays much less CGT (10% or 20% or even zero due to the annual CGT allowance) than tax on interest. Or am I missing something?

Fantavier


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