US Treasury Bond gain treatment

I sold US Treasury Bond at a gain before maturity (e.g. purchased at 95, sold at 98, par value 100). Should the $3 gain be subject to income tax or capital gain tax? And which part of the self assessment return should I fill in to report the gain?

Hi ECH,

As a Deeply Discounted Security (DDS), a US Treasury Bond would normally be subject to UK income tax on maturity.
However, if redeemed or sold before maturity, the transaction would be subject to capital gains tax (CGT).
Any gain (or loss) should be entered in the 'shares and securities'  section of the Self Assesment tax return (and any Foreign Tax Credit Relief claimed in the relevant section).    
CG54602 - Deep discount securities: CGT adjustment

Thank you.

Sorry, why do you suggest that a treasury bond is a DDS? As per your guidelines here (https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim3020), a DDS is ".. a security where the amount payable on maturity, or any other occasion when the security can be redeemed will or may exceed the issue price by more than 0.5% for each year in the redemption period, up to a maximum of 30 years". If a 5y T-bond was issued at 99.5%, it's not supposed to be a DDS, irrespectively of the purchase price by an investor at a later date. Please confirm.

Hi,

In the UK, as the bills are sold at a discount, they may be seen as deeply discounted securities (DDS) that do not pay conventional interest.  

The gain on a DDS is always taxed as income to avoid someone claiming it as capital gain. It seems these are often issued as a type of corporate bond.

On a foreign investment the income is the difference between the purchase and redemption price after each has been converted to sterling on the day the transactions took place, so includes any foreign exchange gains.  

Losses cannot be deducted.

Thank you.

I'm sorry, I don't understand your comment. If I buy a US treasury bond (a treasury bond is not the same as a treasury bill) that is issued at a minor discount, e.g. 0.50% and that has maturity of 5 years, as per the investment manual this instrument is not supposed to be treated as a DDS, because the discount is less than 2.5% (which is 0.5% * 5 years). The bond pays conventional interest. It looks like I have asked a question about one instrument (a 5y treasury bond), and you are providing an answer to a completely different question (apparently, about a bill). I am confused. Please confirm if my understanding is correct.

Hi,
 

SAIM2230 advises on the treatment of discounted securities, other than deeply discounted securities, that all discounts are treated as interest for tax purposes.  See Link: Savings and Investment Manual   . Thank you.

Thank you can I clarify in the above example whether  would be subject to capitak gains tax in relation to fx movements from when I bought the bond and when it has matured? I assume im holding it till maturity

Hi Mimi678,
Please refer to guidance here:
Savings and Investment Manual
Thank you. 

Hello, I don’t understand why the sale of a DDS before maturity would be chargeable to CGT rather than income tax. Wouldn’t both redemption and a sale be classed as a Disposal under HMRC guidelines and therefore chargeable to income tax, or is selling before maturity not classed as “transfer by sale” and therefore not a Disposal? Thanks

Hi Ch330

If the Deep Dicounted Securities (DDS) satisfies the conditions in TCGA92/S117, then the DDS will be a Qualifying Corporate Bond (QCB) and will be excempt for Capital Gains tax.  
If the DDS do not satisfy the condition, they remain chargeable to Capital Gains tax.  Take a look at CG54601 - CG54601 - Deep discount securities: qualifying corporate bonds

Thank you

Hello, Thanks for the reply. Unless I have misunderstood, all of the sections you reference and the conditions in section 117 are discussing corporate bonds, and there is no mention of UK or non-UK government or inflation indexed government bonds, so it is not relevant to this discussion. Please can you clarify why you think TCGA92/S117 is relevant for determining whether a government bond is a QCB.

Hi Ch330,
It appeared that you were enquiring about Deeply Discounted securities (DDS).
Gilt edge securities have different guidance to DDS, so it will depend on the type of bonds you have.
Have a look at the links below to so that you can make a decision on the type of bond you hold.
Gilt-edged securities exempt from Capital Gains Tax
SAIM3010 - Deeply discounted securities: introduction
Thank you 
 

I was enquiring about a DDS. A US Treasury bond is classed as a DDS but is not a corporate bond, nor a Gilt-edged security. As they are the most liquid securities in the world, I would have thought there should be clear guidance on how they are treated for tax purposes in the UK, but it seems not. This was the guidance given by HMRC Admin 20 to the initial post: "As a Deeply Discounted Security (DDS), a US Treasury Bond would normally be subject to UK income tax on maturity. However, if redeemed or sold before maturity, the transaction would be subject to capital gains tax (CGT)." I was querying it, as it isn't consistent with the guidance given for the Disposal of Deeply Discounted Securities. Please can you just clarify, that for a US Treasury Bond that is classed as a DDS, a sale before maturity is subject to CGT, where as it would be subject to income tax on maturity (as per previous reply), and where it says this in the manual, as I can't find it.

Hi Ch330,
Further guidance is here and the links therein
SAIM3010 - Deeply discounted securities: introduction
Thank you. 

 

Hi HMRC Admin 25, I am also interested in where capital gains tax enters the picture. ITTOIA 2005 s427(1): "Income tax is charged on profits on the disposal of deeply discounted securities." ITTOIA 2005 s437(1): "References in this Chapter to the disposal of a deeply discounted security are— (a) to its redemption, (b) to its transfer by sale, exchange, gift or otherwise, including a transfer treated as made by subsection (3)..." Based on this, it sounds like whether a DDS is redeemed at maturity or sold prior to that, income tax prevails. However, I have seen several posts on the HMRC community where admins state that DDSes sold prior to maturity attract capital gains tax instead of income tax. Therefore I assume that must be true. I would very much like that to be true, and I would appreciate a citation to that effect. Thanks!

Hi Jetlyn,

Please refer to guidance at SAIM3010 - Deeply discounted securities: introduction

Thank you.

Hi HMRC Admin 20 - You were the one who said (further up this comment chain) "However, if redeemed or sold before maturity, the transaction would be subject to capital gains tax (CGT)." I'm sure you'll agree SAIM 3010 is a long document referring to many different situations. Given both my and Ch330's confusion, could you please point to a chapter and paragraph of SAIM3010 that would support this? I hope my previous answer shows you I am trying to engage with this material and the relavant legislation, I have read SAIM3010 multiple times, and I'm not sure which part of it supports your statement earlier. Thanks in advance for your help!

Hi,

US government bonds, sometimes known as T-bills or treasury bills are generally taxed as income rather than capital gains. The return is paid at maturity rather than regular interest payments. In the UK, these are known as deeply discounted securities, with the discount being the difference between the price at which they were issued and the price received at maturity.  

On a foreign investment the income is the difference between the purchase and redemption price after each has been converted to sterling on the day the transactions took place, so includes any foreign exchange gains.  Losses cannot be deducted. 

Thank you.

Hi HMRC Admin 32 I am the original poster of this thread and it seems the discussion is getting more confusing after the rounds of exchanges above. In the first reply by Admin 20, I was told: "As a Deeply Discounted Security (DDS), a US Treasury Bond would normally be subject to UK income tax on maturity. However, if redeemed or sold before maturity, the transaction would be subject to capital gains tax (CGT). Any gain (or loss) should be entered in the 'shares and securities' section of the Self Assesment tax return (and any Foreign Tax Credit Relief claimed in the relevant section). " I just want to double-confirm if the above is still correct?

Hi,

It depends on the circumstances of each individual case. Firstly, you should check the definition of a deeply discounted security (DDS) here:

SAIM3020 - Deeply discounted securities: meaning of deeply discounted security

If your bond meets the DDS definition, please then check if it is an excluded occasion of redemption, early redemption, here:

SAIM3030 - Deeply discounted securities: occasions when redemption is ignored

If it is an excluded indexed security the profits would be taxed as capital gains. If not, the profit on disposal is charged to Income tax. You can see guidance here:

SAIM3050 - Deeply discounted securities: excluded indexed securities

SAIM3070 - Deeply discounted securities: taxation: profit on disposal

If you require more detailed help, please contact us directly as we cannot discuss complex individual cases on this forum.

Contact HMRC

Thank you.