Gilt-Edged Securities (Gilts)
What is a gilt?
When the UK government needs to borrow money one way they do this is to issue gilt-edged securities to the public. These are the same as an IOU. So when you buy gilts you are effectively loaning the government money.
The original issue of any new gilt is managed by the Debt Management Office (DMO).
Just like a normal loan there is a redemption date, the date on which the government will pay you back, and an interest rate, where the government pays you interest for loaning them money.
The rate of interest set for the gilt, known as the coupon, will be in line with borrowing rates at the time of issue.
The naming of gilts is based around the nominal interest rate payable and the maturity date set on issue. So for example a typical gilt would be called 8% Treasury 2015.
Because UK gilts are a loan to the government they are seen as being virtually risk free. The UK government has never failed to pay back a loan or make an interest payment on any gilts.
They are traded on an exchange just like any other stocks and shares to allow investors to buy and sell these gilts at a fair market price as and when they are needed.
When gilts are issued and redeemed they have a par value of £100 (known as their ‘nominal value’) and so gilts tend to trade somewhere around this price while they are on the open market. This way the investor knows that if they purchase a gilt at £97 and hold it to maturity they are guaranteed to make a capital gain on their investment.
The rate of interest payable varies depending on the price of the gilt, but if they are bought and held to maturity it is possible to know exactly what your return would be from the investment both in terms of the interest payable and the final capital gain/loss. This combined return calculation produces a figure known as the redemption yield.
Tax treatment of gilts...
Interest is payable twice a year and the payments are made gross but are liable to income tax.
Capital gains made on gilts are free of capital gains tax.
Different types of gilt...
There are many different types of gilts, these include:
Short dated gilts - conventional gilts that usually have a maturity date within 7 years.
Medium dated gilts - conventional gilts that usually have a maturity date within 7-15 years.
Long dated gilts - conventional gilts that are usually dated over 15 years.
Undated gilts - gilts that have no redemption date and will be redeemed at the discretion of the government. Some in issue date back as far as the 19th Century.
Double dated gilts - gilts that can be redeemed at any time between a range of maturity dates.
Floating rate gilts - gilts that have their interest rate set in line with prevailing short term interest rates. There are no more of these in issue.
Index-linked gilts - gilts that have their interest payments and the final redemption value adjusted in line with inflation, the UK Retail Prices Index (RPI).
Gilt strips - gilts that have been separated into their component parts - one gilt that pays regular interest and one that repays the capital.
How can I invest in gilts?
Our Free Range Portfolio offers access to all gilts traded on the stock exchange. These can be bought in your ISA, Personal Pension, SIPP or normal trading account.
Interesting facts about gilts
Original issues of gilts literally had a gilt-edge (or gilded edge), which means the certificate was bordered in paper thin gold.
It is estimated that around two thrids of all gilts currently in issue are held by insurance companies and pensions funds.
During the 2009 quantitative easing programme the Bank of England began to (re)purchase gilts on behalf of the government.
Tax levels, bases or reliefs referred to are those currently applying but are subject to change. The tax treatment of investments will depend on the individual circumstances of the investor.
