I decided to post this here as had a discussion with a friend last night which opened a few questions…
Basically, he sold his home 1 year ago and has been sitting on the cash earning approx 3.5% in term deposit accounts. He rents a similar home for about 2% of what he reckons the asking price would be in a still overvalued market.
On the face of it he is 1.5% better off by renting. However, he obviously has to pay income tax which means he is now losing almost 50% of his interest to the tax man, leaving the after tax yield of his cash closer to 1.75%. As such, he is slightly worse off sitting on the cash and renting versus actually buying an equivalent home.
So, we started thinking about legal ways of converting income from a safe investment into capital gains or even better into gains that are exempt from any tax…
One solution we thought of was to buy say an Irish 10 year government bond at a 4.85% Gross Yield say average (or a bit less than 4% if you want US, UK or Ger/France risk instead).
Obviously the coupons would be liable to income tax. However, lets say just before a coupon pays, you sell the bond and buy a different one with a similar yield that pays coupons on a different date. You keep doing this every 6 months, never actually receiving a coupon, but pocketing the capital gain every 6 months as you are selling the bond with 6 months less 1 days accrued interest and buying one with no accrued interest.
Assuming very little transaction costs, as we are talking about one of the most liquid markets in the world, you are in theory pocketing a 4.85% capital gain. And the real beauty is that capital gains on Par issued government bonds are non-chargeable assets and as such exempt from tax.
The question is…is the revenue likely to have issue with this or be able to determine that the income is liable to income tax even though you never received a coupon. Even though its quite clear that trading gains on government bonds are exempt from capital gains tax.
Just seems that if one even thinks about it for a bit, earning income in a bank account and losing almost half of it to the taxman in the higher tax brackets, is lunacy and there must be very simple ways of doing much better after tax without taking much more risk
[Lets forget about whether people think interest rates on govt bonds are going higher for this discussion, maybe they will…but if its a material move higher I expect house prices will have corrected much more. Also, if you dont like 4.85% offf the Irish govt, than lose 1% and invest in French ones say!]