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Raynor Reviews: Gilts
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Nick Raynor, investment adviser at The Share Centre, explains what gilts are and how personal investors can benefit from these government-issued bonds
In the wake of the credit crunch, government borrowing is greater than at any other time in recent history. The main way in which the government is raising the money it needs is by issuing gilts, many of which are being bought by the Bank of England through its quantitative easing plan. But what exactly are gilts and what do they offer personal investors?
Gilts, or gilt-edged securities, represent a loan from you to the government. Because the government is unlikely to default on a loan, gilts are considered to be lower risk than company-issued bonds.
Gilts generate an income for you through interest on your capital. The amount of income you receive is calculated by applying the annual rate of interest for the individual gilt to its nominal value, ie the amount you get back when the gilt matures.
Final redemption
There are four types of gilt: conventional, dual dated, index linked, and undated gilts. Conventional gilts pay interest half-yearly on dates set at issue and the final payment coincides with the final redemption date.
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Dual-dated gilts are similar to a conventional gilt but with a range of earliest and latest possible redemption dates at the government’s discretion. With index-linked gilts, both the interest payment and the redemption amount are adjusted in line with the Retail Prices Index.
Finally, undated gilts, also known as irredeemables, have low interest rates, and redemption is at the discretion of the government. Perhaps the best known of these types of gilts is War Loan.
You can find the most common gilts listed in the Financial Times within the bonds section under the heading ‘Gilts – UK Cash Market’. The full list appears in the Saturday edition of the paper.
Gilts are priced in pounds per nominal £100, both at the time of issue and when traded on the stock market. Although you can buy units of £1 nominal, this isn’t the price you will actually pay. You’ll pay the market price which reflects the supply and demand for gilts at the time.
The annual rate of interest paid on £100 nominal of stock is called a coupon and is set by the government at the time of issue. It may be fixed for the life of the stock, as with conventional gilts, or it may be adjusted by the inflation rate as with index-linked gilts.
The amount of interest you receive, and for how long, is indicated in the title of the gilt. For example, a ‘7.5% Treasury Guilt 2019’ will pay 7.5% interest per annum on £100 nominal until 2019, when it is redeemed.
It’s worth bearing in mind that the coupon offered on index-linked gilts will be lower than on conventional gilts because of the allowance for the inflation linking of the coupon and the capital.
However, there is no capital gains tax payable on this inflation uplift. All interest payments are made before tax so a taxpayer would need to declare interest payments on their tax returns for income tax purposes.
by Nick Raynor, investment adviser at The Share Centre, 29 October 2009
