Gilt-edged Securities (Gilts)

A gilt is a UK government bond. When you buy one, you’re lending money to the UK government in return for regular interest, and you get the amount you lent to them back when the bond matures.

In the UK, government bonds are called gilts, in the US government bonds are known as treasury bills, or T-Bills, while German federal bonds are referred to as bunds.

Gilts are widely viewed as being among the safest type of bond. However, the interest rate, or yield, available from Gilts is usually quite low – as with all investments, to enjoy potentially higher returns, you need to take on more risk. But a loan to a stable government with a strong economy should help to keep your asset allocation reasonably well spread if you already hold other types of investment.

Types of Gilts

There are two main types of gilts

1. Conventional gilts

These are the most common form of gilts, or UK government bonds. A conventional gilt guarantee to pay the holder of the gilt a fixed cash payment (coupon) every six months until the maturity date, at which point the holder receives the final coupon payment and the return of their original investment (the principal). Conventional gilts have a specific maturity date.

2. Index-linked gilts

The owner of the gilt receives two coupon payments a year, with their money returned on redemption. However, rather than being a fixed amount, the coupon varies as it is based on the Retail Price Index (RPI), a measure of UK inflation. As inflation rises, the coupon and principal is adjusted upwards.

What are gilt yields?

The yield is the annual return an investor will receive for holding a gilt over the next 12 months. The gilt yield is calculated by dividing the annual coupon payments by the current market price. Gilt yields are influenced by various factors, including the outlook for interest rates and inflation, as well as the market demand for gilts.

Bond prices and yields move in opposite directions. So when demand for gilts is high, prices tend to rise and yields decrease. Conversely, when demand is low, prices may fall and yields increase.

What are the tax rules when investing in gilts?

There are two types of return when you invest in gilts. The income and any capital gain. Each element is taxed differently for private investors.

Interest paid by a gilt is taxed as income.

Any capital gains, however, are tax free. If you sell at a capital loss this can’t be used to offset other gains. You also don’t pay any stamp duty or stamp duty reserve tax when you buy a gilt.

If you hold gilts in an ISA or Self-Invested Personal Pension (SIPP), you won’t pay any UK income or capital gains tax on them at all.