Should you consider gilts for your investment portfolio?

High interest rates make gilts an attractive option for some investors, especially higher rate taxpayers who beneft from the tax exemption from capital gains. What exactly are gilts? These UK government bonds, or debt securities, are issued to finance public expenditure. Their appeal lies in their low-risk nature and guaranteed income.

What is a gilt?

Gilt-edged securities, also referred to as gilts, are bonds issued by the UK Government. The term is of British origin, and then referred to the debt securities issued by the Bank of England on behalf of His Majesty's Treasury, whose paper certificates had a gilt (or gilded) edge, hence the name.

SECURING SAFE INVESTMENTS WITH GILTS

Gilts are considered one of the safest options because the British government fully backs them. Think of a gilt as an I2U from the Treasury. Investors receive regular interest payments in return for lending money to the UK government. Most gilts offer a fxed cash payment (or a coupon) every six months until maturity, when the fnal coupon payment is made along with the return on the original investment.

TRADING AND MATURITY OF GILTS

Investors have two options:

1. Hold on to the gilts until maturity or

2. Sell them on the sceondary market, much like company shares

Short-term gitls mature between one to five years, medium term gilts have a lifespan of five to fifteen years, while long term gilts exceed fifteen years, some even extending up to fifty years. Generally, gitls with longer lifespans have higher interest rates then those maturing soon.

UNDERSTANDING GILT YIELDS

The annual return an investor gets for holding a gilt over the next 12 months is known as the yield. It's calculated by dividing the annual coupon payments by the current market price.

Various factors influence gilt yields, including the outlook for interest rates, inflation and market demand for gilts. Interestingly, bond prices and yields move in opposite directions.

THE RISE OF GILT YIELDS

Since the pandemic, interest rates have skyrocketed as the Bank of England tries to control inflation. Interest rate changes signifcantly impact bond prices, especially

when they are forecasted to keep increasing. As interest rates increase, bond prices generally fall, and vice versa. The inverse relationship is due to new bonds with high coupon rates being issued at higher interest rates then older bonds that have been issued at lower rates.

THE TAX BENEFITS OF GILTS

While Income Tax applies to the interest earned from gilts, they are entirely exempt from Capital Gains Tax (CGT). This means there's no CGT to pay on profits from selling a gilt or when it matures. This exemption is especially beneficial for higher rate taxpayers who'dotherwise have to pay 20% CGT. Moreover, theres no tax on gilts held in a tax efficient wrpapper such as and ISA of SIPP.

PROTECTING CAPITAL WITH INFLATION-LINKED GILTS

For investors concerned about inflation, inflation-linked gilts offer a reliable way to protect their capital if held to maturity. The principal and interest are tied to inflation, ensuring investors receive a return that keeps pace with the cost of living.

GILTS AND PORTFOLIO DIVERSIFICATION

Gilts provide a safer alternative during uncertain times, and their low correlation with stock markets makes them an alternative diversifier. By including gitls in a well diversfied portfolio, investors can mitigate risk and balance their exposure to different asset classes as the coupon is fixed at the outset.