EU Government Bonds

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

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

Geuze

Déja Vu.

I recall a very similar thread recently.

Capital gains/losses are separate from coupon income.

Capital gains/losses can't be added or deducted from coupon incomes.

Declare any coupon income on your normal Form 12 income tax return.

GalwayGareth

Thank you Geuze, so for clarity, as I cannot see the recent thread. I can deduct the accrued interest I paid when I bought the Bond from the Coupon interest I received at Maturity on the Bond?

Marcusm

you can’t deduct the “purchased” accrued coupon except in a transaction subject to s815 TCA 1997 which does not include a maturity. You’re in the unfortunate position that you have a large income item which is taxable (the full coupon receipt) without any reduction for the fact that much of it was accrued when you bought it. It is possible depending on the period for which you held it that the income tax payable will exceed the amount of your economic income. The corresponding capital loss might be of some value depending on whether you have capital gains now or in Future. It’s one unfortunate side effect of an fairly inappropriate system for investment income.

GalwayGareth

This is the point that leaves me confused as the seller on the secondary market has to tax the accrued interest they receive to avoid bond washing, until they sell the bond so in effect that interest segment is getting taxed twice, by the seller and by the buyer of the bond - this does not make sense?

GalwayGareth

My interpretation of the Finance Act yo refer to is the accrued interest is paid by the seller on the Secondary market as per below or am I wrong?

Subject to paragraphs (b) to (d) and subsection (3), where the owner of a security (in this subsection referred to as “the owner”) sells or transfers, or causes or authorises to be sold or transferred, the security and where any interest payable in respect of the security is receivable otherwise than by the owner, then, for the purposes of this section—

(i) interest payable in respect of the security shall be deemed for the purposes of the Tax Acts to have accrued on a day to day basis from the date on which the owner acquired the security, and

(ii) the owner shall be chargeable under Case IV of Schedule D on interest so deemed to have accrued from that date up to the date of the contract for sale or transfer of the security or the date of payment of the consideration in respect of the sale or transfer, whichever is the later.

Geuze

I bought Irish Govt bonds last year.

Coupon at purchase = a minus figure, I paid the coupon to the previous owner

Later coupon = a positive figure, I received the coupon income

My income = (minus figure) + (positive figure) = total coupon income

Marcusm

https://www.boards.ie/discussion/comment/122698012#Comment_122698012

it’s an artefact of the way the anti-avoidance for bond washing was brought in back in 1984. The focus was on counteracting the avoidance rather than an equitable or fair result. Where an individual receives greater coupon income tha. Has been “earned” by them there is no effective reduction in traceable income for the excess. S815 (originally s29 FA1984) computed the tax arising on the final sale (in this case it was a maturity so the anti-avoidance provision didn’t apply) rather than aggregating it with the coupon income to come up with an equitable position. The U.K. position (existed up to 1996 or later) was more equitable.

back in 1993, I had to do a review exercise for a large private client manager with ward of court and similar clients. Their investment teams had been pickup op gilts 7-10 days before the ex- date and receiving the coupon. The client was earning 37-40 days income but was taxed on a full six months. Turned out cost as they were reputable and refunded the clients for the tax which arose due to their laxness.

Marcusm

https://www.boards.ie/discussion/comment/122699602#Comment_122699602

I no longer have access to the precedents but back in 1988, Revenue agreed that no interest accrued during the ex- period such that the minus days interest was not taxable as income. It was essentially a capital component (counter factually) as the purchase was discounted by reg to the inability to earn interest during that period. The gain arising from the minus days interest was CGT or actually exempt when dealing with Irish government bonds.

Geuze

Jaysus, you know much more than me.

Okay, my previous post may be misleading, sorry.

GalwayGareth

Thank you guys, complex subject and the absolute majority of threads I read people minus the accrued interest from their coupon at maturity so possibly not clear from Revenue on what to do in these instances or indeed their descriptions are complex.

Marcusm

https://www.boards.ie/discussion/comment/122701713#Comment_122701713

those people are unfortunately failing to file correct returns. The authority to exclude the accrued coupon only arises on a sale or transfer whereby the new owner becomes entitled to interest accrued on the instrument. By definition maturity does not encompass this. The full coupon received or receivable is taxable without reductionz

GalwayGareth

Thank you Marcusm, this is very beneficial as I want to ensure I am 100% tax compliant. The flip side is that the few bonds I bought for 6 months were bought discount to par, so they are all capital gains as I knew on purchase I would hold to maturity. I assume there is no issues buying EU Bonds at discount to par, holding for the short term to maturity, then receiving the capital gain and paying interest on all interest received at the end ( including the accrued interest)

Geuze

@Marcusm can I pick your brains?

I bought an Irish Govt bond with a very low coupon 0.20%, which is trading below par.

On the day I bought them, I was charged "bought coupon" of minus 9.84.

Two weeks later, I received the normal annual coupon, 10.11.

I intend to hold until maturity.

I realise it's small money, but based on what you are saying, I should declare the 10.11 on my tax return?

I thought it might be (10.11 - 9.84) = 27 cent.

Marcusm

the coupon is interest income and if received without withholding tax would be case III income. The “bought coupon” would, absent a sale prior to maturity, be part of the capital cost. If you want to remove the tax inefficiency, you should sell it with at least as much accrued coupon as when you bought it. It trades below par because the coupon rate is lower than current rates, ie was issued more than 3 years ago.

Geuze

Okay, thanks.

So the bought coupon cost is considered a cost of acquisition, along with stockbroker commission fees, etc., for the purposes of CGT.

Okay, thanks.

Of course, I won't be paying any CGT on the gain, as these bonds are exempt from CGT.

GalwayGareth

Marcusm, sorry again though now I am lost!! So as mine are EU Bonds CGT gain and loss comes in to play. So I need to add accrued interest (bought interest) to the fees and what I paid for the bond then compare this to the maturity value I receive back to decide is there a loss or gain which I declare. I then need to tax all income ( bought/accrued and the coupon I also receive) This is also different to what I have read in 100 places as most people do not state the accrued / bought coupon is part of the bond price for CGT!!

https://www.boards.ie/discussion/comment/122703660#Comment_122703660

Marcusm

https://www.boards.ie/discussion/comment/122704011#Comment_122704011

if yours are Irish gilts then as you say they are not a chargeable asset. All the more reason to ensure that you manage a pre-maturity sale at an appropriate point so the taxable interest = the interest accrued over the period.

Marcusm

https://www.boards.ie/discussion/comment/122704262#Comment_122704262

I have no idea who “most people” refers to. The full “dirty” price (ie inclusive of accrued coupon) is the base cost, the brokers fees are incidental cost of purchase. That is such settled law that it is difficult to see how anyone could get that wrong. If you sell with accrued income then that will fall into a s815 calculation and that amount is separately excluded from the proceeds of sale as it is chargeable to income tax. There is only one asset, the bond. The right to interest is not a separate asset unless you are buying IO and PO strips.

GalwayGareth

Sorry, my mistake, though for clarity - When I buy an EU non Irish bond on the secondary market and pay the dirty price. When the bond comes to maturity 6 months later: To calculate my CGT, is this the formula I use in Ireland?

Dirty Price ( inclusive of accrued income) MINUS Face Value = CGT Gain or Loss

Marcusm

https://www.boards.ie/discussion/comment/122705054#Comment_122705054

generally it would be the exact opposite, ie [Proceeds of redemption exclusive of any coupon payable at redemption which will generally equal face value of bond] minus [Dirty price at acquisition plus incidental costs of acquisition] = chargeable gain or allowable loss.

There is a point that exempting Irish bonds while taxing other EU govt bonds is probably a restriction on the freedom of movement of capital.

GalwayGareth

Cool, thank you Marcusm. So the government gets income tax from the seller ( accrued interest through a s815 calculation) and income tax from the buyer who holds to maturity and gets all the interest - some of the same money would be taxed twice?

This is interesting stuff! Thank you very much for the help

Marcusm

https://www.boards.ie/discussion/comment/122705504#Comment_122705504

the largest holders of gilts would be pension funds (tax exempt) and banks (taxed on accounting measure of income rather than cash receipts) so it’s really only an issue for retail

Investors.

GalwayGareth

Thank you very much Marcusm, you've been a great help. Much appreciated.