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  • Deeply Discounted Security: does the definition depend on price at issuance or acquisition?

    The rules on when a bond is a deeply discounted security are set out here: So a bond issued today with a price of 98, and redeeming at 100 in one year, is considered a DDS. However, the rules in the link above mention only the price at issuance, not the price at purchase. Does this mean that, if a bond was issued at par (so was not a DDS at issuance), but is now trading at 98, and maturing at par in a year, then it is NOT a DDS? If that is correct,, and this bond is not a DDS, then this means I can have two bonds, both trading at 98 today, both redeeming at 100 in a year, of which only one is a DDS, because one was issued today at 98 while the other was issued last year at 100. If that is not correct, and both bonds in the example are DDS, then the HMRC guidance I had linked above is imprecise because it references only the price at issuance, not at purchase. Can you please clarify? Given the level of confusion on this topic, and the contradicting answers received in other sections of the forum, it would be most helpful if you could please point to a specific section of your manual or of the law on this matter. SAIM3020, linked above, does not answer the question. Thank you.
  • RE: Capital gains on bond funds and ETFs: taxed as income or capita gain?

    Thank you for providing the link, but I'm not sure it answers the question. Let me rephrase it: Let's suppose I hold an EU-domiciled bond ETF, with UK tax reporting status, in an investment account (not a SIPP, not an ISA). It is a distributing, not an accumulating, ETF, so it distributes the coupons it receives, without reinvesting them. These distributions are taxed as income. Let's suppose this bond ETF holds 4 bonds, of which 2 are deeply discounted securities (DDS) and 2 are not. Let's say I buy the ETF in January; in April rates go down and the price of the ETF goes up. In May I sell the ETF for a profit. If I had held those 4 bonds individually, buying them in January and selling them in May, the capital gain from the 2 DDS would have been taxed as income, while the capital gain from the 2 non-DDS would have been taxed as capital gain, right? The question is: how is the capital gain on the bond ETF taxed? Is it taxed always as a capital gain, even if some of the bonds it holds are DDS? If the answer is yes, then there is a discrepancy on the taxation of DDS held individually vs held inside a bond ETF. if the answer is no, part of that capital gain is taxed as income, then there is no discrepancy but I have no idea how to break down the profit between capital gain and income because, to my knowledge, the asset managers managing bond ETFs do not disclose this information. Could you please clarify? Ideally providing references to guidance which covers this point EXPLICITLY? I note that STSM101060 does NOT address this point at all. Thank you!
  • RE: Capital gains on bond funds and ETFs: taxed as income or capita gain?

    Thank you. However, in practice, UK domiciled ETFs do not exist (e.g. the justetf portal doesn't list any, nor have I ever come across any): most ETFs are domiciled either in Ireland or Luxemburg, and only a handful in other EU countries. Does your answer apply also to EU-domiciled ETFs, as long as they have UK tax reporting status? I understand that, for these, one must report the Excess Reportable Income and that, if the ETF is accumulating, to adjust the capital gains calculation to take into account the taxes already paid on income reinvested and not distributed - to be clear, this is not the question, I just want to confirm if capital gains are always taxed as capital gains. Also, does your answer (ie that capital gains on ETfs are never taxed as income) apply also to ETFs which track overnight rates, like CSH2 and XSTR? They are both Luxembourg-domiciled ETFs with UK tax reporting status [Admin removed link] Finally, could I please ask if there is an explicit reference in the HMRC manuals confirming this point that capital gains on ETFs with UK tax reporting status are always taxed as capital gains? I would like to ensure there isn't a degree of interpretation on the matter. Thank you!
  • Capital gains on bond funds and ETFs: taxed as income or capita gain?

    The rules on deeply discounted securities are set out quite clearly here: It is therefore straightforward to understand when a bond is a DDS, and when capital gains are taxed as capital gains, and when as income. My question is: how about bond funds or bond ETFs? Is the capital gain on those always taxed as capital gain? Or is there a look-through to the underlying assets? E.g. if I make a capital gain on an ETF holding only gilts, is that capital gain tax exempt, just like the capital gain on the underlying gilts would be? How about when the fund contains a mix of DDS and non-DDS? To my knowledge, funds and ETFs do not disclose this breakdown. Should the capital gain therefore be taxed ... how exactly? Lastly, to what extent is this open to interpretation, and to what extent is this set out clearly in statute or in HMRC manuals? Thank you!