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Bond income
Rishan
Posted: 13 March 2017 16:18:47(UTC)
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Hi all, does the income from bonds count towards your dividend limit? Is income classed differently for directly held bonds and bond funds/ETFs? Investment trusts are my vehicle of choice, but I'm assuming income from these is always a dividend.

Basically most of my investments (100% equities) are held outside ISA so now I need to start rearranging things prior to 2018.

Are others thinking ahead to mitigating the new 2k allowance?
Julian Wang
Posted: 20 April 2017 16:08:22(UTC)
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Bond income count as INTEREST.

Julian
Rishan
Posted: 20 April 2017 20:00:22(UTC)
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thanks Julian, I thought so. I know that bond/fixed interest will count towards any income tax.
andy mac
Posted: 21 April 2017 06:31:21(UTC)
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Anything that can be held under an ISA should be
1 user thanked andy mac for this post.
Keith Cobby on 21/04/2017(UTC)
Joe Soap
Posted: 21 April 2017 06:57:15(UTC)
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Income from an investment trust that invests in bonds are dividends. Not interest.
Julian Wang
Posted: 21 April 2017 07:25:44(UTC)
#6

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When it comes to funds.

Whether distribution is taxed as dividend or interest depends on the underlying asset mix.

Roughly if the fund is more than 60% bond, its taxed as interest; if the fund is more than 40% equity, its taxed as dividend.

eg

Vanguard Lifestrategy 40% equity is taxed as dividend.
Vanguard Lifestrategy 20% equity is taxed as interest.

Julian
Tug Boat
Posted: 21 April 2017 10:48:08(UTC)
#7

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I've looked at the HMRC web site recently for exactly this reason and it's not clear - there are a couple of fact sheets.

They appear to class anything from UT IT and bank interest as being able to be offset against the £1000 income allowance. These are examples from the fact sheet.

It is not clear if there is a distinction made between income and dividend when they describe the £5000 allowance for dividends. Although the word dividend is used, this appears to be a generic term for a payment from a company.

There are no mention of UTs dividends held outside an ISA, they just waffle on about company divis.

I think it is us who are complicating it as we don't want to fall foul of the law.

I am going to treat the payment from my IT holdings outside ISAs as contributing to this 5k limit as this is in "the spirit" of the rules even though some are bond funds and REITs.
Julian Wang
Posted: 21 April 2017 11:05:57(UTC)
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Its NOT up to you to decide whether the distribution should be treated as interest or dividend for tax purpose.

For a fund which has a mixture of bond and equity, when the distribution is more than 60% from bond, the whole distribution is taxed as interest! (converse also apply)

If you are not sure, as your broker/fund administrator.



Julian
Tug Boat
Posted: 21 April 2017 11:15:19(UTC)
#9

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FFS, the distribution rules are not in question, the issue is the guidance from HMRC is not clear.

I might add, as usual.
Joe Soap
Posted: 21 April 2017 11:28:38(UTC)
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Investment trusts are not funds. They are quoted companies on the stock market just like any other PLC. Like all other PLC's they pay dividends on their shares. The underlying investment held in the IT is entirely irrelevant.
Tug Boat
Posted: 21 April 2017 12:24:56(UTC)
#11

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The reason I was looking into the issue is I held bonds directly, ITs, REITs and UTs outside an ISA.

The REITs distribute PIDs sometimes which are classed as income, my bonds are income.

ITs are all fine as this is divi. The UTs are Divi or income, there's no mention if UTs fall into the 5k allowance.

I now hold no UTs outside an ISA, sold em.
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