These are a type of instrument issued by UK building societies. Technically they are not bonds, but a type of risk capital, being subordinated to deposits and other senior obligations of the society. Because of their fixed coupons PIBS behave in a manner similar to bonds. Individual issues vary greatly in coupon, price, yield and other features such as calls.
PIBS can be bought and sold on the LSE in round amounts, usually varying from 1,000 shares up to 50,000 shares. No stamp duty is payable on purchases. Unlike Gilts, PIBS cannot be redeemed, so in order to sell there has to be a buying counterparty in the market, therefore you may not be able to sell when you want to. PIBS are relatively illiquid, as the number/amount in issue is relatively small.
Like other fixed interest securities if interest rates rise then the value of a PIBS goes down; conversely, if interest rates fall then a PIBS value rises. There are also variable rate PIBS, where the interest rate changes in line with interest rates generally. Interest is payable annually or six-monthly in arrears. Rates are normally higher than the returns for Gilts.
Risks associated with PIBS
In the event of a Building Society becoming insolvent, all other investors would be paid first, and only if there was sufficient left would the PIBS holders be repaid.
Theoretically PIBS are riskier than other Building Society investments and therefore generally attract a higher interest rate than ordinary Building Society cash accounts. Unlike other Building Society Investors, PIBS holders are not covered by The Financial Services Compensation Scheme.
Taxation associated with PIBS
PIBS are exempt from Capital Gains Tax but income is subject to Income Tax on interest. Income is paid gross with tax deducted through an individual's tax return.
PIBS can be held in tax efficient accounts such as the TD ISA and TD SIPP.
Tax treatment depends on individual circumstances and may be subject to change in future.