Gilts

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Gilts

These are loans you make to the government in the form of bonds which usually have a fixed lifetime. You do not have to hold them for that set period because you can buy and sell them on the stock market.

Stocks are often described in terms of their 'nominal' or 'par' value of £100. This is a convenient way of dividing the stocks into units, but, if you bought a nominal £100 stock, e.g., what you pay could be more or less than that amount. British Government stocks are called 'gilts', reflecting the very sound nature of these stocks because of the unlikely possibility that the government would ever default on them.

There are two ways to buy. If you buy stock when it is newly issued, you can do so direct from the Debt Management Office (the part of the Bank of England that issues stock on behalf of the government). New stock is auctioned and you must bid for at least £1,000 of stock. There are no dealing charges on stock you buy this way. Alternatively, you can buy stock that has already been issued and is traded on the stock market. You can buy this way through a stockbroker or through the Bank of England Brokerage Service. There is no set minimum investment, but dealing charges make buying small amounts (less than, say, £1,000) is uneconomical. However, the Bank of England Brokerage Service charges tend to be lower than a stockbroker's for smallish transactions.

The return is made up of two parts: while you hold the stock, you are paid a fixed amount of interest every six months; when the stock is sold or comes to the end of its life, you make a capital gain or loss. Some stocks pay a very low amount of interest and are useful only for people who are mainly after capital gains. Other stocks pay a high level of interest and are particularly useful for people who need income immediately; it may even be worth reckoning on some capital loss (by buying the stock at more than its nominal value) if a high income is a major priority. If you hold the stock until the end of its life (until it is 'redeemed'), you will get back a known amount of £100 for each nominal £100 of stock you hold. This means that you know from when you purchase the product exactly what return you will get overall if you hold the stock to redemption: that is, the return is fixed and guaranteed.

Alternatively, you can sell the stock before redemption, in which case you cannot be certain in advance what capital gain or loss you stand to make. So the nature of the return depends on how you choose to use these stocks. The income from all gilts is normally paid gross, i.e., without any deduction of tax, especially convenient for non-taxpayers.

However, the income is taxable, unless you are a non-taxpayer. You can request to receive the income from gilts net of tax, in which case you will receive interest after deduction of tax at the savings rate of 20%.

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