The government or a business can borrow money in the form of bonds. They are a type of money used for loans to businesses. To put it simply, they’re like an I.O.U., but on a bigger, more official level.
There are some important things to keep in mind if you buy a bond:
- In a way, you are lending money to the person who gave you the bond.
- At some point, the seller will have to pay you back with interest or the bond’s value.
- Corporate debt comes in the form of bonds.
- When interest rates go up, bond prices go down, and when rates go down, bond prices go up.
It can be hard to understand the language used to talk about ties. Take a look at the picture below to understand what all that terms mean.
Important things that bond gains mean for taxes?
- If a bond gave you a coupon, that money is treated as income from savings interest.
- That extra money you get when you sell a government bond, which is also known as a “gilt,” is not taxed.
- Bond earnings saved in an ISA are also not taxed at all.
Bonds are bought by who?
Most of the time, bonds are bought by individual and professional investors. There are two ways to make money from them: either just keep getting interest payments until the bond matures, or sell it for more than you paid for it.
In the UK, government bonds are called gilt-edged assets. They are often sold at auction to large banks, which then sell them on the stock market.
How do bonds help with tax efficiency?
If you have a bond in the UK and take money out of it, you might be charged Income Tax. But if you make money from an investment bond, the government taxes it at 20% and takes the money right out of the bond.
You can also take out up to 5% of your account each year, and if you don’t use it, you can carry it over to the next year. You won’t have to pay any extra tax if you do this.
If you pay 40% or 45% Income Tax, this means that bonds can be a good way to lower your tax bill if you are a higher or additional rate user. But when the bond matures, you will be charged the tax bill that is still due. Click here to read more.
