Are Irish government bonds tax free?

[spiritsight]

If I were to buy a 1 year Irish government bond and received 4% interest at maturity. Is this all tax free? If this is the case not sure why it’s not more recommended on this sub hell even buying stocks would be about 9% but taxed at 41% so really only 5.3% after tax + a tonne of risk and volatility. Are Irish government bonds actually the best investment after maxing out your pension and buying property?

 

[seth504]

@spiritsight State Savings are deposits for which you normally would pay DIRT, but they are DIRT exempt and no other tax is due.

You still have to declare them.

 

[spiritsight]

@seth504 But the state savings are a fraction of the return you get on the Irish government bonds…

 

[seth504]

@spiritsight Ah missed the gov part, I assumed he meant State Savings, not just bonds you buy in any exchange.

 

[resjudicata]

@spiritsight Where are you getting an Irish government bond with a 4% yield and no coupon (so not tax on the coupon) ?

 

[roman959]

@spiritsight It would be good for someone to confirm, but I suspect it is only tax-free if your get one of the products available on statessavings.ie.

And over there, I don’t see anything close to 4% for a one year period.

Edit: just googled it and found some bond issuance circulars from the NTMA, like this one: https://www.ntma.ie/uploads/general/0.35-Treasury-Bond-2032-Offering-Circular.pdf

In the taxation section, the circulars always specify that for Irish tax residents, interest paid on the bond will be assessable to income tax.

So buying bonds directly (outside of state savings) doesn’t seem to be tax-exempt, and whether it makes sense to you might depend on your marginal income tax rate.

 

[chris1984]

@roman959 Tax free on capital return, but the coupon portion is not tax free. So Irish bonds are Cgt exempt. If it is a zero coupon issue it is tax free. Some issues have a very low coupon, eg. 0.2%, so these are extremely tax efficient for Irish investors.

 

[roman959]

@chris1984 Depends on how you look at it.

The OP was suggesting to buy relativitely short term bonds as an alternative to deposit accounts as an attempt to avoid DIRT (so presumably holding the bonds to maturity to avoid any risk of capital loss with the principal; and relying on the coupons). From this perspective, the CGT exemption is of no benefit as there would be not capital gains, and all the coupons received would be taxed.

However, if someone sees the bond as a speculative instrument, for exemple to bet on the ECB dropping their interest rates (and therefore bond prices rising on the secondary market), then yes the CGT exemption is useful. But this is definitely not something to recommend as an alternative to a savings account (and if someone wants to do that, they’ll probably buy longer bonds than the 1 year suggested by the OP because their perspective would change from being a saver to being a speculator, and longer bond would be a better way to achieve capital appreciation if their speculation is correct).

 

[chris1984]

@roman959 I could be misunderstanding but you might be missing something in how bonds work. Bonds offer a return that is split between capital return and income. A zero coupon bond will issue at a price, say 90, with a maturity date, and a principal value that it pays out, say 100. It will not pay a coupon. And when you look at the yield on the bond, it will include that roll up to the principal value. So when you buy a bond to be held to maturity you can predict the capital return (tax free on Irish bonds) precisely. This is a very suitable replacement for a deposit and there is no speculation involved, assuming you are comfortable with the maturity date.

Now, the Irish government has issued very few bonds in the last few years so there are nearly no issues to use. If they issued bonds maturing every month like the German government do it would be fantastic. There just isn't demand today. But if they did offer zero coupon bonds with a maturity every month (even German gov don't do this) then you could easily replace a deposit account with that, and avoid dirt.

 

[eastcascade]

@spiritsight Tax free for gains. Coupons different. Excellent thread on Askaboutmoney on this topic here: https://www.askaboutmoney.com/threads/irish-government-bonds-for-the-retail-punter.230776/

 

[horsiejuice]

@spiritsight Minor thing, stocks are taxed at 33% on profits over €1270 per year

I'm actually not sure if they're tax free but the below indicates that they are tax free if you're resident here

https://everlake.ie/articles/irish-government-bonds/#:~:text=Irish%20government%20bonds%20are%20tax,investors%20marginal%20rate%20of%20tax

 

[hollyoyo]

@horsiejuice There is no capital gains tax on Irish government bonds. There is income tax, usc on interest

 

[neodakine]

@spiritsight Tax due on the coupons. Tax free if you hold to maturity

But you will still pay tax on the coupon

 

[chris1984]

@spiritsight CGT free. Get a low coupon bond and it is very tax efficient. Mad that so few people know this.

 

[sg83]

@spiritsight Yes, so long as you buy them thru state savings