#Unveiling the hidden potential of gilts

Clarion Chartered Financial Planner Jacob Hartley explains the surprising appeal of gilts in the current economic environment:

Inflation and rising interest rates have become prevalent topics in today’s news.

The dramatic increase in interest rates to try to dampen down on runaway inflation since the start of 2022 has caused UK government bonds, known as gilts, to fall in value.

Current market conditions have caused gilts to trade at a significant discount to their nominal value. This presents a unique opportunity for investors to secure tax-free, guaranteed returns and clients might like to explore the advantages of investing in gilts as an alternative to traditional savings arrangements such as deposit and short-term treasury accounts.

In this article, we will delve into the dynamics of gilts, their potential for capital appreciation, and how they can generate largely tax-free, guaranteed returns.

Rising inflation has required the Bank of England to increase interest rates.
High inflation and rising interest rates render gilts less attractive, causing their prices to fall.
Consequently, gilts now trade at a significant discount to their face value, enabling investors to benefit from guaranteed, tax-free capital appreciation in addition to receiving a twice-yearly coupon.

A significant benefit of investing in gilts is that capital appreciation is not liable to either income tax or capital gains tax making them a very attractive alternative to cash deposits particularly for higher and additional rate taxpayers.

By acquiring gilts at a discount to their face value and holding them until redemption, investors can benefit from guaranteed, tax-free, capital appreciation.

This tax-efficient strategy can be highly rewarding as per the following example:

On July 4th, a £100 nominal UK gilt with an expiry date of January 30th, 2026, had a coupon rate of 0.125% and traded at £88.23. While the interest payments are minimal, when considering the profit on redemption, the overall gain amounts to £12.15 for an investment of a little more than £88, a profit of almost 14% net over 2.5 years (after accounting for 45% income tax on the interest). This results in a NET annual yield to redemption of over 5.2% per annum, equivalent to a savings account paying interest of 9.58% per annum. Notably, £12 of the return is received completely tax-free, making this an attractive investment for higher and additional rate taxpayers.

Individuals holding substantial cash reserves may wish to consider the advantages of gilts compared to traditional savings arrangements. By embracing the historically low-risk profile of gilts, investors can leverage the power of tax-free capital appreciation over a relatively short period of time.

Gilts with different redemption dates, short, medium or long term, are available and the ability to trade at the then market price before the redemption date makes them a highly liquid investment.

In an era of inflation and rising interest rates, it is worthwhile taking time to explore the investment opportunities that offer tax-efficient returns. Gilts, with guaranteed capital appreciation and attractive tax advantages, present a compelling option.

Sound investment advice is essential to ensure informed decision-making.

Risk warnings

The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.

The above taxation information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.

The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.

Unveiling the hidden potential of gilts in an era of high interest rates and inflation

Unveiling the hidden potential of gilts in an era of high interest rates and inflation

Risk warnings