Tax Treatment of Bonds

[spanners]

If I buy a 5 year bond say at 3.5%, I understand that the 3.5% income is subject to income tax, but if I spend the sale proceeds of the bond on maturity presumably that is equivalent of spending capital?

The reason I ask is I'm looking at creating a bond ladder to cover some future income requirements.

 

[jpd]

Don't forget that disposing of the bond , either during before its redemption date or on its redemption date could give rise to a Capital Gain or Loss depending on the type of bond. If you talking about Irish Government Bonds and you are resident in Ireland , then no taxable gains or loss arise but otherwise there will be capital tax implications

 

[Brendan Burgess]

if I spend the sale proceeds of the bond on maturity presumably that is equivalent of spending capital?

Money doesn't have any self-consciousness. It doesn't know where it has come from.

So if you have €110,000 in a bank account - 100,000 from a matured bond and €10,000 in accumulated interest - if you spend €5,000, it is from your account and neither capital nor interest.

I'm looking at creating a bond ladder to cover some future income requirements.

I think you are doing some unnecessary mental accounting here. And most people do. There shouldn't really be any distinction between income and capital growth. If CRH pays me a dividend and Ryanair doesn't, so what? If I need income, I sell some Ryanair shares.

It's unlikely that bonds would be a good investment for you.

You should probably post all the details in the Money Makeover forum and you might get some ideas on how to deal with your future spending requirements.

Brendan

 

[spanners]

@Brendan thanks, the reason I think it may be worth looking at is that I am currently on the lower tax rate. And if I can avoid moving up to higher rate on any additional income so much the better.

@jpd - thanks, I figured that if I hold to maturity any capital gain would be a bonus, and not averse to CGT on the gain.

 

[jpd]

I can't see anyone making a capital gain out of bonds in the foreseeable future - bond prices fall when interest rates rise and the only certainty at the moment is that interest rates will rise - no idea when, but they will