What is the opportunity?
Interest rates have been so low over the last 15 years, the UK government was able to borrow from the markets at very low rates of interest. At times during this period, some Gilts were issued with a coupon as low as 0.10% p.a.
With interest rates rising significantly over the last couple of years, the interest offered by these older, low coupon Gilts are now far less attractive than newer Gilts that have been issued in this higher interest rate climate. Consequently, the value of the older Gilts in the market have fallen below their original nominal value of £100 and are trading at significant discounts to their maturity value.
Given that Gilts will redeem at their nominal value if held to maturity, there is an opportunity to buy these older, low coupon Gilts significantly below their maturity value, whereby the majority of the return is generated by way of a capital gain.
- For example, if a Gilt maturing on 31t January 2025 is currently trading at £93.00, if you bought it now and held it until it’s maturity date, you would be repaid its nominal value of £100, thereby making a capital gain of 7%.
This is particularly attractive for higher and additional rate taxpayers, as while the interest paid by Gilts is taxable at the individual’s marginal rate of income tax, capital gains made on UK Gilts are tax-free.
In summary, this means that a higher or additional rate taxpayer could generate a significantly better net of tax investment return from holding a low coupon Gilt, than holding the same amount in a bank deposit.
In the table below, we have provided an illustrative return comparison that could be enjoyed by higher and additional rate taxpayers by holding a short-dated Gilt, alongside the equivalent rate that would need be offered by a bank deposit to achieve the same net of tax return:
|
Price
|
Coupon
|
Maturity Date
|
Net Redemption Yield
|
Bank AER*
(Higher rate taxpayer)
|
Bank AER*
(Additional rate taxpayer)
|
|
£93.1526
|
0.25%
|
31/01/2025
|
5.00%
|
8.34%
|
9.08%
|
*This shows the equivalent interest rate that would need to be offered by a bank deposit to generate the same level of interest as the above short-term Gilt.
What are the risks?
It is important for investors to be aware that there will likely be price fluctuations between now and when the bond matures. Therefore, if you needed to sell the Gilt for whatever reason prior to its maturity date, then you may receive back less than you originally invested. If, however, you are able to commit to holding the Gilt until its maturity, then this is a very attractive way of generating a higher net of tax return than holding your surplus savings in a bank deposit.
Are there any minimum investment amounts?
Generally, we would suggest minimum investment amounts to be greater than £250,000. However, this would be considered on a case-by-case basis.
How do I find out more information?
