Bonds
Jonathan Holmes
I only had a vague understanding of bonds before researching them: they’re basically high interest savings accounts that may lock your money away for a set amount of time, usually years.
UK Bonds may be subject to tax:
- Usually subject to income tax (unless in ISA or SIPP wrapper, or some gilts).
- Not usually subject to capital gains tax (unless corporate bonds from an issuer not qualifed by HMRC).
I grasp them better now but are bonds a worthwhile investment for Brits living abroad for extended periods of time, such as myself?
Table of Contents
UK Government Bonds
One of the most secure bond investments for expats is UK government bonds, also known as gilts. These bonds are issued by the British government to finance public spending and projects. Gilts provide guaranteed returns at fixed interest rates and have virtually no risk of default given the UK government’s strong credit rating.
As a British expat, buying gilts allows you to diversify globally while still supporting your home country’s economy. They offer attractive interest rates and terms ranging from 1 to 50 years. Popular options include short-dated gilts maturing in 5 years or less for stable cash flows or long-dated gilts reaching maturity in 30 to 50 years for higher returns.
Conventional gilts
Conventional gilts, the simplest and most common UK government bonds, make regular interest payments (coupons) every 6 months and promise to repay the original amount borrowed on a set date. They provide guaranteed returns at fixed interest rates and have virtually no risk of default given the UK government’s strong credit rating.
For example, an investment of £1,000 in a conventional gilt labeled ‘1½% Treasury Gilt 2047’ will pay back £15 per year at a rate of £7.50 every six months before the original sum is returned to the investor when the bond expires.
Index-linked gilts
Index-Linked Gilts are similar to Conventional Gilts but take into account inflation when paying their coupons every six months, as well as the principal sum. This means their returns can fluctuate, but if inflation is steady and predictable then these are a better choice than Conventional Gilts.
Both types of UK government bonds look fine to me, but their interest rates are hardly exciting compared to those of far more lucractive, yet slightly riskier corporate bonds.
Corporate Bonds
Tax status: exempt from Capital Gains if bought directly from the issuer, as long as they’re qualified by HMRC.
Corporate bonds issued by well-established UK companies are another option to consider. These bonds help finance business operations and expansion plans in exchange for regular coupon payments to bondholders. Companies with solid credit ratings and profitable track records can provide healthy returns on these bonds with moderate risk profiles.
Top companies across major sectors like banking, oil and gas, telecom, etc. offer corporate bonds to individual and institutional investors. You can select individual bonds or invest in low-cost bond funds that provide instant diversification.
Corporate Bonds have by far the most attractive interest rates, albeit at a greater risk that gilts.
Foreign Bonds
Tax status: untaxed if bought directly from the issuer in pounds, as long as they’re qualified by HMRC.
Foreign bonds are bonds issued by foreign companies for sale in pounds in UK markets.
I don’t know much about foreign bonds or how to buy them. They’re more complicated than domestic bonds due to corrency conversion rates.
Premium Bonds
Premium bonds are a popular savings vehicle offered by NS&I, which is backed by Her Majesty’s Treasury. With premium bonds, instead of earning interest you are entered into a monthly prize draw where you can win tax-free prizes between £25 and £1 million.
The minimum investment is £25 and the maximum is £50,000. The estimated prize fund rate is currently 1.4% but there is no guarantee what you will win each month. The upside is premium bonds protect your initial capital and bring the thrill of potentially big prizes.
Premium Bonds, while seductive with their million pound jackpot, on average return less than other bond options.
Are UK bonds worth it for British expats? My conclusion
Yes, UK bonds are worth it for British expats providing you only invest what you can afford to, because, while your money may be secure, you can’t get it if you need it early.
Corporate bonds are my pick of the bunch for their high interest, security, and capital gains tax-free status as long as they’re from a qualified issuer.
