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Government bonds

  • 09-07-2023 1:28pm
    #1
    Registered Users, Registered Users 2 Posts: 720 ✭✭✭


    Hi, am thinking of investing in government bonds as I'm recently retired and have a small gratuity which I'd like to save for a rainy day. However, I have a larger amount from a house sale which I thought to put in bonds also as the market is very unpredictable at the moment and I don't expect to find a property within the next 6 months or so. Does anyone know how long it takes to surrender the bonds in the event that I find somewhere.



Comments

  • Registered Users, Registered Users 2 Posts: 27 John_100


    I am looking at Irish Govt. bonds at the moment, but not finding it easy to work out who is the cheapest broker to go with, as some seem to have a minimum investment of €100,000, which is ok for some!

    Have you, or anyone else reading, bought Irish Govt. bonds recently, and if so, what was the minimum investment amount and commission charge.

    Cantor Fitzgerald, who are a primary dealer for the NTMA, have o 0.5% commission fee, and then an annual charge of 0.5% once the bond is purchased. This charge is very high and eats into the annual coupon interest, so they are not a good option in my opinion.

    Any experts on Irish Govt. bonds here?



  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze


    I bought Irish Govt bonds on DeGiro recently.

    Commission = 3 euro.



  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze




  • Registered Users, Registered Users 2 Posts: 27 John_100


    Yes, I bought one on Degiro as a test. I was able to buy €1 worth and the commission was €3 as you stated. Degiro do not quote all the Irish Treasury Bonds for some reason, which is a bit silly!

    For small amounts, 10k to 30K, then Degiro is the way to go, as the Irish brokers have a 0.5%commissioncharge with a minimum charge (around €100), and some then charge a 0.5% annual handling charge, which is crazy if you are investing a few hundred K in bonds, as the coupon interest will be eaten into with this annual charge.

    They are definitely looking good at the moment, especially if you are buying to hold and to receive the coupon interest, which of course is taxed as income tax and has to be filed in your annual return.

    I assume you are familiar with yield to maturity and how to compare the various bonds on offer - at first it can be a little difficult to grasp, but after a few hours of serious work it is easy to grasp the basics and for the beginner to be aware of what bonds offer.



  • Registered Users, Registered Users 2 Posts: 27 John_100


    I think this is all the Irish bonds on Degiro - if you find any more please post.


    you can see my test purchase here of €1 on 10/07/23 along with recent trade volumes





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  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze


    Key point is that there is no CGT on Irish Govt bonds.

    Many trade below par now, due to large falls in bond prices during last year.

    The zero and low coupon bonds trade down at 80 and 90.

    If held to maturity, there is a risk free and tax free capital gain.

    The yield to maturity is about 2.6% to 2.8%, below inflation, but above deposit rates.



  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze


    There is one zero coupon bond, if you want to avoid declaring any income.

    Next up is the 0.20% coupon bond mentioned above.



  • Registered Users, Registered Users 2 Posts: 27 John_100


    If you are putting a nice bit of money into Irish Treasury Bonds then you can easily lose out on a good few K over the investment period, due to the annual charge by the broker. I would not put a large amount of money into a Degiro account, for obvious reasons, but I would also not pay 0.5% annual charge on an account just to leave the bonds sit there, as that is just throwing your money away.

    €100,000 x 0.5% =€500 commission plus €500 annual charge so down €1,000 in first year. The more you invest the more you are down!

    Some brokers are cheaper than others with their annual charge, but better again if you don't have to pay any annual charge :)



  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze


    A lad on AAM asked me about buying 500k of Irish Govt bonds on DeGiro!!!



  • Registered Users, Registered Users 2 Posts: 27 John_100


    One thing that I did not check yet, and you might know the answer?

    If interest rates start to pull back then bond prices will rise, hence you might decide to cash in and take your profit a bit early, as you will now receive more money to sell the bond than what you paid for the bond.

    I assume that this realized profit is also CGT exempt, but I have not verified it yet?

    Actually, I think my assumption here might be wrong, as if you buy and sell securities for profit I think Revenue consider that as "trading" and hence it will come under income, but I will check it for certain.



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  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze




  • Registered Users, Registered Users 2 Posts: 27 John_100


    only if you hold for a period of time..as i thought..if you "trade" bonds..as in buy and sell in the same year and make a profit on any price increase in the bond value..then..you might find that you have an uphill battle with revenue to try and prove that this profit is not to be considered as income for that year..same as the coupon interest.


    in summary..if you buy an Irish Treasury Bond and hold to expiry for a few years or more..then no CGT is payable..BUT..if you buy and dispose of a bond in any year..then..i regretfully say that the profit realized is considered income for that year..and you have to declare it for tax..with revenue..it is always better to be safe..than sorry :)

    i hope someone proves me wrong..but i don't think anyone will !




  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze


    Dealing/trading means ongoing buying and selling, regularly and consistently, so that the Revenue sees you as a trader, rather than a saver.

    Somebody who buys and sells shares and bonds a few times a year is not a trader.

    See badges of trade.


    @John_100 you have nothing to worry about.

    Buy and sell shares/bonds several times a year, and you are not a trader, so you don't pay income tax on the gains.

    Of course, you may owe CGT on any gains from shares, but not from Irish Govt bonds.



  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze




  • Registered Users, Registered Users 2 Posts: 27 John_100


    i don't think you are 100% correct here..it is a dodgy area and revenue will never tell you that you are not liable for income tax if you only buy and sell so many times in a year..it is always best to pick the ways that you know there will be no dispute over..as in buying and holding a govt. bond to maturity..clear cut and no argument from revenue..BUT..once you sell the govt. bond prior to maturity..and depending on how much you make..i believe that revenue might well consider this profit as income..

    to be honest..i would not take the chance..even spread betting..which is tax free..if done regularly with the intention to make profit..is considered as income by revenue..

    of course..each person can decide what to do with their own income tax returns!





  • Registered Users, Registered Users 2 Posts: 1,678 ✭✭✭nompere


    There is specific anti-avoidance legislation - S.815 TCA 1997 - designed to prevent bond washing, where bonds are sold shortly before the payment date of interest, as the selling price will include an accrual for that interest.

    815 Taxation of income deemed to arise on certain sales of securities

    Summary

    This section counters a practice known as “bond washing” whereby securities are sold

    before the payment of interest so that the interest accrues to the holder as a capital gain

    rather than as income. The person selling the securities is liable for tax in respect of the

    interest which is deemed to have accrued on a day to day basis up to the date of sale.

    This provision does not apply in certain circumstances including, if the security has been

    held by the same owner for a continuous period of at least 2 years, or where the seller is

    a dealer in securities the profits of whose trade are assessed to tax under Case I of

    Schedule D.



  • Registered Users, Registered Users 2 Posts: 27 John_100


    so what is your understanding in relation to profit made on the buying and selling of govt. bond prior to redemption date..say if i buy a bond say tomorrow..and sell in 2 months time for a profit of say €3,000..

    my understanding is that revenue will consider this as income..as per the badges of trade..and i would have a difficult task proving otherwise!



  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze


    If you buy today, and sell in a few months, and make a gain, then that is a capital gain.

    It may be subject to CGT.


    If you did that daily, or maybe even weekly, consistently, then it may be considered a trade.


    Doing it a few times a year is not a trade, and so is not subject to income tax.



  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze


    Tens of thousands of people in Ireland buy and sell assets each year, and submit CGT returns.

    They are not considered traders, and are not subject to income tax.

    If what you say is correct, it would be all over Boards and AAM.

    It is not, because a few trades a year does not constitute enough to define you as a trader.



  • Registered Users, Registered Users 2 Posts: 27 John_100


    i still think revenue will consider it as income.. especially if the intention can be seen to be that the asset was bought for short term gain

    the reason why it is not all over boards or aam is probably because anyone who does such a transaction is not declaring it as income..and it will not be an issue unless revenue have some reason to look into the transactions

    however..i do intend to find out from the horses mouth..but as previously mentioned..i do not expect revenue to tell anyone that is ok to make money on a short term transaction..and have that transaction considered as cgt rather than income

    with revenue.. everything is fine until something goes wrong..so..it is always to best to err on the side of caution.. remember all those poor old ladies who had to pay out all they had to revenue..just because their husbands decided to listen to the bank managers and give a UK address to avoid paying dirt tax..and the poor old ladies did not know a think about it !!!!



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  • Registered Users, Registered Users 2 Posts: 154 ✭✭decko11


    They seem part of a listed group with market cap of 800m - would you be worried about holding any amount of shares over the insured amount of 100k ?



  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze


    Be careful, Govt bonds are not deposits, and so are not insured deposits. the 100k insurance limit is not relevant here.

    That said, Govt bonds are a liability of the State.

    The State has always repaid its debts.



  • Registered Users, Registered Users 2 Posts: 154 ✭✭decko11



    indeed - with all the talks of a strategic default around 2010-12 - Risteard Mulcahy the famous surgeon recalled his dead General Mulcahy saying that he and Generl Collins when they raised funds post independence agreed never to default



  • Registered Users, Registered Users 2 Posts: 21,868 ✭✭✭✭dxhound2005


    Capitalist countries don't default, they just keep borrowing more. It would be extraordinary for any Minister for Finance to say that they would default. Especially on money borrowed from his own citizens. Whether we or the USA or the UK are good for our foreign debts will never be tested. The lenders are not going to come looking for 33 trillion Dollars from the USA tomorrow.

    Collins was (Sinn Féin) Minister for Finance, it seems in the lucky position to start off with no debt belonging to the Free State. The next Sinn Féin office holder will not start off with a clean slate.

    https://www.oireachtas.ie/en/debates/debate/dail/1921-12-15/1/



  • Registered Users, Registered Users 2 Posts: 26 GalwayGareth


    Sorry if I am in the wrong area though really need help on this. I bought a German Government bond through Trade Republic in August 2023 and it matured June 2024. There was a capital gain loss, though when purchased I paid the accrued interest which went to the seller and this was then given back with additional coupon interest on maturity. In this instance, I assume my Income which I declare is the Interest I received minus the Accrued interest and also I can use the loss as a Capital Gains Loss? Any advice would be really appreciated, thank you



  • Registered Users, Registered Users 2 Posts: 26 GalwayGareth


    The Flip side to this is I also bought another EU Bond at discount to par, held for 6 months to maturity and got a 300 euro capital gain and very small interest coupon. Is this a capital gain which needs to be declared or would this be classed as " income" as per above conversations? Thank you



  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze


    This is the third time I have come across posts like these.

    Capital gains/losses on assets are separate from income earned on assets.

    The coupon income from holding the bonds is declared in your normal Form 12 income tax return.



  • Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze


    Have you read this:

    https://www.revenue.ie/en/gains-gifts-and-inheritance/transfering-an-asset/index.aspx

    How to calculate CGT

    Note

    You must file a return if you have disposed of an asset, even if there is no tax due. Further information can be found on the previous page. 

    CGT is only applied to the ‘chargeable gain’, not the whole amount you receive. The chargeable gain of an asset is the difference between:

    • the amount you received for it (the sale price)
    • and
    • the amount you paid for it (the purchase price) and any ‘allowable expenses’.

    Note

    You must calculate your chargeable gain for the whole tax year.

    If you have more than one gain, you must add them together. You will also need to deduct any losses. All of this information will need to be detailed on your return

    If you owned the asset before 2003, you may claim indexation relief.

    You might need to use the ‘market value’ instead of the sale price or purchase price. For example, if you gift an asset to someone instead of selling it. The market value of an asset is the best price you would get if you sold the asset on the open market.

    Note

    If you are an individual, you have a personal exemption of €1,270 each year. If your chargeable gain is less than this, you will not have to pay any CGT.

    Rate of CGT

    The rate of CGT is 33% for most gains. There are other rates for specific types of gains. These rates are:

    • 40% for gains from foreign life policies and foreign investment products
    • 15% for gains from venture capital funds for individuals and partnerships
    • 12.5% for gains from venture capital funds for companies.

    Venture capital is money that is invested in a start-up company or a small business.

    What are ‘allowable expenses’?

    These are costs that you can deduct from the sale price to work out your chargeable gain. They can be:

    • any money spent by you which adds value to the asset (known as ‘enhancement expenditure’)
    • costs (for example, fees paid by you to a solicitor or auctioneer) when you acquired and disposed of the asset.

    When do you use market value?

    You will need to use the market value of the asset to work out your chargeable gain if:

    • it was a gift to someone other than your spouse or civil partner
    • you sold it for less than it was worth to help the buyer
    • you inherited it and are now disposing of it
    • you bought it before 06 April 1974.

    How to calculate how much CGT to pay

    When you have worked out your chargeable gain, you must work out your taxable gain by deducting:

    • your personal exemption (if you are an individual)
    • any other exemptions or reliefs due
    • and
    • allowable losses.

    When you know what your total taxable gain for a tax year is, you must multiply it by the rate of CGT. The responsibility remains with you to make an accurate assessment of your liability, if any.



  • Registered Users, Registered Users 2 Posts: 26 GalwayGareth


    Thank you Geuze, my question is regarding accrued interest on the purchase of the Bond and if this can de deducted from the Coupon interest I received on maturity?



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  • Registered Users, Registered Users 2 Posts: 5,150 ✭✭✭homer911


    My amounts are very small but that's what I plan to do
    In relation to the capital loss, Geuze earlier stated "there is no CGT on Irish Govt bonds". This would appear to exclude German Gov. Bonds. Therefore gains would be liable to CGT and losses could be offset or carried forward.

    I would expect that if an Irish Bond is currently trading at a premium eg 2.4 per cent Treasury Bond 2030 and "there is no CGT on Irish Govt bonds" then any losses on maturity would NOT be available for offset against other taxable gains



  • Registered Users, Registered Users 2 Posts: 26 GalwayGareth


    Thank you Homer911, to me the above makes sense!



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