How to Buy Corporate and Government Bonds in the UK

Bonds are a financial instrument representing a loan from an investor to a borrower, such as a government or company. When you buy a bond, you lend money for a specified period, receiving interest payments and the original loan amount back at a future date. Bonds allow entities to raise capital for public projects or business expansion. Navigating the UK bond market offers an opportunity to diversify an investment portfolio and potentially generate regular income.

Understanding Bond Basics in the UK

In the UK, government-issued bonds are known as gilts. Considered secure due to the UK government’s strong repayment history. Issued by HM Treasury and managed by the Debt Management Office (DMO) to finance public spending. They pay a fixed interest payment (coupon), usually semi-annually, until a set maturity date when the original principal is repaid.

Corporate bonds are debt instruments issued by companies to raise capital. They offer regular coupon payments and principal repayment at maturity, but carry higher risk than gilts. A company is more likely to default than a government. Interest rates on corporate bonds are usually higher to compensate for this increased risk.

Retail bonds are issued by companies directly to individual investors, typically in smaller denominations. Designed for public accessibility. Some retail bonds are listed on exchanges like the London Stock Exchange’s Order Book for Retail Bonds (ORB) and are tradeable; others, called ‘mini-bonds,’ are unlisted and cannot be traded before maturity.

Key terms include ‘yield,’ which indicates the actual return an investor receives, considering the bond’s current market price relative to its coupon and face value.

Choosing Your Investment Channel

Several avenues exist for purchasing bonds in the UK. One option is direct investment in government products from National Savings and Investments (NS&I). NS&I offers products like Premium Bonds and Guaranteed Growth Bonds, popular savings options backed by the UK Treasury. Premium Bonds offer tax-free prizes instead of interest, while Guaranteed Growth Bonds provide a fixed interest rate over a set term, with minimum investments typically starting from £500.

For traditional gilts and corporate bonds, online stockbrokers and investment platforms are common. Platforms like Hargreaves Lansdown, Interactive Brokers, AJ Bell, and IG provide access to bonds listed on the London Stock Exchange. These platforms allow direct purchase of individual bonds and often provide research tools and market data. Fees typically include account maintenance charges (flat fee or percentage of assets) and trading commissions, such as around £11.95 for online trades. Minimum investment requirements for individual bonds vary, but corporate bonds are often traded in lots with a minimum purchase of £1,000.

Investing through bond funds or Exchange Traded Funds (ETFs) is another approach. These funds hold a diversified portfolio of bonds, managed by professionals, providing exposure to multiple bonds with a single investment. Bond funds and ETFs can be accessed through online investment platforms and suit investors seeking diversification without selecting individual bonds. While diversified, understand the fund’s underlying assets and characteristics, as their value can fluctuate, and they do not have a maturity date like individual bonds.

Preparing for Your Bond Purchase

Before purchasing bonds, set up an investment account. UK investors can choose from several account types, each with distinct tax implications. A Stocks and Shares ISA (Individual Savings Account) allows investments to grow free from UK income tax and Capital Gains Tax (CGT). Investors can contribute up to £20,000 annually to an ISA.

A Self-Invested Personal Pension (SIPP) is another tax-efficient wrapper, offering tax relief on contributions and tax-free growth. SIPP investments are exempt from income tax and CGT, though withdrawals in retirement are subject to income tax. For investments outside these tax-advantaged accounts, a General Investment Account (GIA) is used, where income and capital gains are generally taxed.

Identifying investment goals and assessing risk is crucial. Bonds are often chosen for income generation and capital preservation, but they are not risk-free.

Key Bond Risks

Credit risk: The possibility that the bond issuer may fail to make interest payments or repay the principal.
Interest rate risk: Bond prices typically fall when interest rates rise, as newly issued bonds offer higher coupons, making older bonds less attractive.
Inflation risk: Erodes the purchasing power of future fixed payments.

Understanding UK bond investment tax implications is vital. Income from bond coupons is generally subject to income tax at an individual’s marginal rate. A Personal Savings Allowance (PSA) provides a tax-free amount for savings interest (£1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers). Capital Gains Tax (CGT) may apply to profits from selling bonds. UK government gilts are exempt from CGT, as are most corporate bonds denominated in pounds and deemed “qualifying corporate bonds” by HMRC. Bonds held within an ISA or SIPP benefit from these tax exemptions.

Gathering information about the specific bond is essential before execution. This includes the bond’s International Securities Identification Number (ISIN) or ticker symbol. Investors should determine the desired quantity of bonds and understand the current market price and yield. Accessing this information typically involves using the search and research functions of the chosen investment platform.

Executing Your Bond Purchase

Once an investment account is established, funded, and the desired bond identified, the purchase process typically follows a structured path on an online investment platform. Log into your chosen platform and navigate to the bond trading section, which may be labelled as “fixed income,” “bonds,” or “gilts.” This section provides access to the available bond universe for trading.

Search for the specific bond you wish to buy using its ISIN, name, or ticker symbol. The platform will display relevant details, including its current market price. Bond prices are quoted in two ways: the ‘clean price,’ which excludes accrued interest, and the ‘dirty price,’ which includes accrued interest since the last coupon payment. When purchasing a bond between coupon payment dates, you typically pay the seller the clean price plus any accrued interest.

After reviewing the bond’s details, specify the quantity of bonds you intend to purchase. Platforms generally allow you to input either the nominal value (face value) you wish to acquire or the number of individual bonds. Select an order type: a ‘market order’ executes the trade immediately at the best available price, while a ‘limit order’ allows you to specify the maximum price you are willing to pay. A limit order will only execute if the bond reaches that price or better, helping manage price risk in volatile markets.

Before confirming, the platform will present a summary of your trade, including the total cost, any applicable commissions, and the settlement date. Review all details for accuracy. After verifying the information, confirm the purchase. The order will be placed, and the bond will settle, typically within a few business days, appearing in your investment account.

Managing and Selling Your Bonds

After a bond purchase, managing your investment involves understanding payment reception and monitoring performance. Interest payments, or coupons, are typically paid directly into your investment account or linked bank account on scheduled payment dates, usually semi-annually for many UK bonds. These payments represent the fixed income stream from your bond holdings.

Periodically reviewing your bond’s performance is sensible, though individual bonds held to maturity are less volatile than equities. Changes in interest rates or the issuer’s credit rating can influence a bond’s market value if you sell it before its maturity date. While the original principal is repaid at maturity, the bond’s market price can fluctuate significantly beforehand.

If you sell a bond before its maturity date, the process is similar to buying. Access your investment platform, locate the bond in your portfolio, and initiate a sell order. The sale price will be the prevailing market price, which could be higher or lower than your original purchase price. When selling, you will also receive any accrued interest from the last coupon payment date up to the sale’s settlement date.

When a bond reaches its maturity date, the issuer repays the nominal value, or face value, of the bond. This final principal repayment, along with any final coupon payment, will be credited to your investment account. The bond then ceases to exist, and the capital becomes available for reinvestment or withdrawal. Some platforms may automatically transfer matured funds into a low-interest holding account if no instructions are provided.