Bonds (tax, inflation)

[fluppet]

As part of a defensive portfolio designed to provide a regular income, I have been considering investing in bonds (government and other low-risk).

I have read previous posts here suggesting that bonds had bad tax implications:

the income is liable to tax at 42% compared to 20% dirt on deposits. (The capital gain may be tax free - check it out if it's relevant).

-Brendan 02/07/2004

Could this be clarified a bit?

With the possibility of continuously rising oil prices in the future leading to inflation, would bonds be a bad idea? In the USA, inflation-adjusted bonds are available, but I would prefer Euro bonds - are these available?

Finally, I have read BIAM's well-written guide to bonds, and other sources of information. Most seem to be written with the assumption that you are going to be selling the bonds before they mature - concern about how rising interest rates cause bond prices to decrease, etc. For my plan of using the bond to provide regular income, would I not just hold the bond until it matures, receiving the interest payments along the way and then the par value at the end?

Thank you.

 

[ClubMan]

Could this be clarified a bit?

Where does the confusion arise? Bond income is assessable for income tax at your marginal rate (20% or 42%). Any gain arising from the sale of the bond is assessable for CGT.

Remember that bond prices are generally inversely correlated to interest rates and interest rates have been rising recently and may continue to do so.

 

[fluppet]

Thank you for the reply.

So if I am retired and so not receiving much income, I may not pay any tax on the bond interest payments?

I know that bond prices are approximately inversely related to interest rates. (For others reading, this is because bonds are issued at a fixed interest rate which is related to the prevailing interest rate at the time of issuance, so if interest rates increase after the bond has been issued, then the bond becomes less attractive as deposit accounts, etc., have become more attractive, so people will be willing to pay less for the bond, and so the bond price decreases). I, however, said that I was planning to hold the bond until maturity, so the variance in the bond price does not matter to me. I would probably wait until I feel that interest rates are near their peak before buying, anyway.

So nobody knows of an inflation adjusted euro bond, then?

 

[jpd]

Inflation adjusted Euro bonds are available from France, Italy and Greece. Information on the French bonds (OAT€i) are [broken link removed]

 

[dam099]

Inflation adjusted Euro bonds are available from France, Italy and Greece. Information on the French bonds (OAT€i) are [broken link removed]

Quickly scanning the French ones linked above the inflation rate they are linked to is either French or Euro, both of which are lower than current Irish inflation. However over the medium to longer term one would hope Irish inflation will converge with the Euro average.

 

[ClubMan]

Thank you for the reply.

So if I am retired and so not receiving much income, I may not pay any tax on the bond interest payments?

If you are exempt from income tax and bond income does not push you into the tax net then presumably all of your income remains tax free?

 

[fluppet]

jpd: Thanks for the link, I'll have to look into the French one more closely.

dam099: Yes, I am hopeful that the Irish inflation rate will move closer to the French rate. The inflation caused by increasing oil prices (which I want to guard against) will, I believe, cause global inflation at approximately the same rate (at least within the EU). I know the inflation would probably be a little bit less in France as their energy price inflation would be less as they have nuclear power stations, but transport costs and all of the products that use oil in their production (plastics, etc.) will go up. It's all just speculation on my part, but I at least want to protect against the possibility.

ClubMan: Yes, that is what I was asking. So bond income is treated quite like dividend payments, then? This might be better asked in the Taxation forum, but as it is also relevant to people interested in investing in bonds: Can you confirm that there is no difference from a taxation point of view between Irish government bonds, Irish non-government bonds, EU government bonds, and EU non-government bonds: for all of them, they are treated just like a normal source of income on which I will only pay Irish income tax (at 0%, 20%, or 42%)? This would then make them different from the case in the USA where you do not pay certain taxes on certain bonds - I think US Treasury bonds are exempt from federal tax, munincipal bonds are exempt from federal, state, and local tax, etc.

Thanks again