
If you’re a higher rate or additional rate taxpayer in the UK, the enduring challenge is how do you source competitive, secure and tax efficient rates for any savings you hold or for any fixed term deposits you may be using to cover future liabilities e.g. Income tax payments.
Interest rates of 4% plus may look attractive, but for a higher rate taxpayer this results in an after-tax rate of 2.4%, likely well below your own rate of personal inflation.
Is there a safe, tax efficient and easy to administer alternative?
Step forward UK Gilts
What is a Gilt?
When the UK Government needs to borrow money, it can issue a bond. This is a way of requesting a loan from investors via the financial markets. In buying a bond, investors are loaning the government money.
The government pays interest on these bonds (known as ‘coupon payments’), and it repays the initial bond value (known as the ‘principal’) to the investor at the end of the loan period, see graphic below.
Why are they called Gilts?
UK Government bonds are often called ‘gilts’ because the paper certificates for bonds in the past had a gilded (golden) edge. The name also refers to the security and reliability of holding the bond as an investment.
How safe are UK Gilts?
The UK Government has never failed to repay a gilt.
Will the price you paid for a Gilt fluctuate?
Gilt prices will change in value over time because the price is dependent on market conditions, such as interest rates and inflation expectations.
However, we are referencing Gilts which have a relatively short time period (two to three years) before they will be repaid and if you have purchased the Gilt for less than the £100 face value, the UK Government is guaranteeing you will be repaid £100 at maturity.
Why might a Gilt be a tax efficient option?
All gilts mature at £100, so if you purchase a gilt for less than £100 the capital gain you make (the difference between the purchase price and the maturity price) is exempt from Uk capital gains tax.
Interest (normally described as the coupon) paid by a gilt is taxed in the same way as savings interest, so if it falls within your personal savings allowance it will be tax-free.
Gilts can be held in ISAs and so can be totally tax-free.
What happened to UK Gilt prices when Liz Truss was prime minister?
The price of gilts with longer than 10 years to repayment fell dramatically, emphasising why gilts, for the purposes of what we are describing within this article, should be considered with less than three years to repayment and ideally not sold before their maturity date.
If you have a question relating to Gilts, please either complete the form below or contact us on 01825 73 33 66
Note:
- This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
- The taxation of the investment is dependent on the individual circumstance of each investor, and may be subject to change in the future.
- The favourable tax treatment of ISAs may be subject to changes in legislation in the future.