How are bonds taxed in the UK?
Answered 11 March 2026
How Are Bonds Taxed in the UK?
The tax treatment of bonds in the UK depends on who holds them (individual or company) and what type of bond is involved. There are three main regimes to understand.
What the Law Says
1. Individuals – Interest Income
Interest on bonds is charged to income tax as savings and investment income under Part 4 of ITTOIA 2005. Where bonds are issued as funding bonds (i.e. bonds issued instead of a cash interest payment), the issue is treated as a payment of interest equal to the market value of the bonds at the time of issue.
2. Individuals – Deeply Discounted Securities (DDS)
Where a bond is issued at a discount (i.e. the redemption amount exceeds the issue price), the profit on disposal is charged to income tax under Chapter 8 of Part 4 of ITTOIA 2005 (s.427). The profits are treated as income even if they would not otherwise be so.
3. Individuals – Capital Gains: Qualifying Corporate Bonds (QCBs)
Disposals of qualifying corporate bonds (QCBs) are exempt from Capital Gains Tax. Sterling-denominated, non-convertible loan stock, loan notes and debentures are likely to be QCBs. Gilts (UK government securities) are also exempt from CGT.
4. Companies – Loan Relationships
For companies subject to corporation tax, bonds are taxed under the loan relationships regime in Part 5 of the Corporation Tax Act 2009. Profits and deficits are calculated using the credits and debits given by Part 5 (s.296 CTA 2009). Non-trading profits are charged to corporation tax on income; non-trading deficits can be set against profits, carried back, or carried forward.
HMRC Guidance / Practice
Individuals
- The Savings and Investment Manual (SAIM) covers the taxation of interest and other returns on government securities and corporate bonds for individuals and trusts.
- Deeply discounted securities are government securities and commercial bonds where the redemption amount exceeds the issue price. The DDS rules ensure gains are taxed as income rather than capital gains. These rules apply only to income tax payers (individuals/trusts) — not to companies.
- The Accrued Income Scheme (AIS) applies to most marketable securities (including government and corporate bonds, but not shares). It taxes accrued interest on the transfer of bonds as income, preventing the conversion of income into capital gains (historically known as "bond washing"). The AIS applies to non-corporate taxpayers only (individuals and trusts); companies use the loan relationships rules instead.
- Most gilts and QCBs are exempt from CGT. Sterling-denominated non-convertible loan notes, loan stock and debentures are likely to be QCBs.
Companies
- The Corporate Finance Manual (CFM30000 onwards) sets out the loan relationships rules under Part 5 CTA 2009, covering how bonds and other debt instruments are taxed for companies, including special rules for connected companies, group transactions, investment trusts, and funding bonds.
- For companies, a discounted security (whether as holder or issuer) is a loan relationship and is taxed under the CTA 2009 Part 5 rules. The income tax DDS rules do not apply to companies.
Summary Table
| Taxpayer | Bond Type | Tax Treatment |
|---|---|---|
| Individual | Interest-bearing bond | Income tax on interest (savings income) |
| Individual | Deeply discounted bond | Income tax on profit on disposal (ITTOIA Pt 4 Ch 8) |
| Individual | QCB / Gilt on disposal | Exempt from CGT |
| Individual | Non-QCB bond on disposal | CGT applies (subject to AIS for accrued interest) |
| Company | Any bond | Loan relationships regime (CTA 2009 Pt 5) |
Citation sources
The Accrued Income Scheme changes the basis on which interest which has accrued up to the date of sale of most marketable securities is taxed. Instead of forming part of the sale proceeds or purchase price charged to Capital Gains Tax it is now treated as income. Full guidance can be found at SAIM4000. The special rules of TCGA92/S119 apply to the Capital Gains Tax treatment of disposals and acquisitions of securities within the scope of the Accrued Income Scheme. Their broad aim is to adjust th
Part 4 Savings and investment income Chapter 8 Profits from deeply discounted securities Charge to tax under Chapter 8 Charge to tax on profits from deeply discounted securities 427 1 Income tax is charged on profits on the disposal of deeply discounted securities. 2 The profits are treated as income for income tax purposes if they would not otherwise be income.
come in accordance with Part 5, CTA 2009 (s 295(1) CTA 2009) and that profits and deficits arising to a company from its loan relationships are to be calculated using the credits and debits given by Part 5 (s 296 CTA 2009). 16. Section 299(1) provides that the charge to corporation tax on income applies to any non-trading profits which a company has in respect of its loan relationships. Section 300(1) provides that any non-trading deficit which a company has from its loan relationships must be b
CFM30000 onwards sets out the tax rules on ‘loan relationships’, which are found in Part 5 of the Corporation Tax Act 2009. Use this section to find out what loan relationships are and how they are taxed, including the rules on transactions between groups of companies and between connected companies, certain special types of company such as investment trusts, and certain special types of debt such as funding bonds.
This section of the Savings and Investment Manual explains the tax treatment of ‘deeply discounted securities’ (‘DDS’). These are government securities and commercial bonds and loan stock, where the amount paid on redemption is higher than the price at which they were issued. The difference is the discount and represents the whole or part of the reward to the holder of the security for the use of the money borrowed by the security issuer. Where certain conditions apply, the tax rules ensure that
Prior to the introduction of the Accrued Income Scheme (AIS), accrued interest included in the sale price of interest-bearing securities was not taxable as income. See Wigmore v Thomas Summerson and Sons Ltd (9TC577) and SAIM2250. This gave rise to a form of avoidance known as ‘bondwashing’ or ‘dividend stripping’, in which income was converted into capital gains. The AIS was introduced on 28 February 1986, and tackled the problem by taxing accrued interest on the transfer of securities as incom
The Savings and Investment Manual (“SAIM”) explains the taxation of various types of savings and investment income of individuals and trusts, other than that received in the course of a trade. The income dealt with in SAIM covers interest and other types of return received on cash deposits in bank and building society accounts, Government securities, and corporate bonds; dividends and other distributions received on shares and other types of equity holdings in a company, including amounts receiv
Part 4 Savings and investment income Chapter 2 Interest Other income taxed as interest Funding bonds 380 1 This section applies to the issue of funding bonds to a creditor in respect of a liability to pay interest on a debt incurred by a government, public institution, other public authority or body corporate. 2 The issue is treated for income tax purposes as if it were the payment of so much of that interest as equals the market value of the bonds at their issue. 3 In this section “ funding bon