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Gilt-edged securities or "gilts" are fixed interest
stocks issued by the Government. The gilt usually has a fixed term
at the end of which (the redemption date) the nominal value is repaid
in full; it can be bought or sold at any time at the market price
prevailing. In the past it was possible to purchase gilts listed
on the National Savings Stock Register from the post office. This
list has been replaced by the Bank of England Register. Although
post offices can supply the application form needed, British Government
Stock Leaflet (BOE Purchase), the completed form must be sent to
the Bank of England Registrar's Department in Gloucester.
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The interest payable on a gilt is fixed at outset and is expressed
as a percentage of the nominal value. This is known as the "coupon"
of the gilt. The coupon would be the actual return to the investor
if the price paid was exactly equal to the nominal value. In practice,
the price of gilts generally fluctuates inversely in line with interest
rates. Thus if interest rates rise, the market price of a gilt will
fall so that the return available on the purchase price stays roughly
in line with interest rates available in the market generally.
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The interest on gilts purchased on or after 6 April 1998 is paid
gross unless an application for net payment is made. The reverse
applies to gilts held prior to 6 April 1998 i.e. interest will automatically
be paid net unless the holder applies to receive gross interest
payments.
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The total return for the investor is thus made up of two elements,
partly the interest which is received, and partly any capital gain
(or loss) which arises between the date of purchase and the date
when the gilt is either sold or redeemed.
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Gilts are therefore secure if held to the redemption date, because
the redemption price is fixed. However, the value of the gilt can
fluctuate on the market, and if sold before redemption there may
be a gain or a loss to the investor. These fluctuations tend not
to be as marked as in the equity market, though, partly because
of the guaranteed redemption value, partly because of the fixed
interest, and partly because interest rates tend not to swing wildly.
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Gilts can be an attractive investment, particularly for those who
require certainty of income, or for those who believe that interest
rates generally will fall and therefore expect a capital gain to
be made on the gilts.
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Gilts can be 'shorts' (up to 5 years to redemption date), 'mediums'
(5 to 15 years), 'longs' (over 15 years), or undated (no fixed redemption
date).
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From a tax point of view a particular advantage of gilts is that
any capital gain made is free of CGT (note also that any loss made
cannot be offset against other capital gains for tax purposes).
Income is liable to income tax at 10%, 20% or 40% as applicable.
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Corporate Bonds are similar to gilts. They are issued by
both UK and foreign companies. They have a fixed term and interest
rates. The interest rates are higher than those offered by gilts.
They are transferable and can be bought and sold through a stockbroker
and are CGT free, but losses are not usually able to be offset against
CGT.
Interest is paid net of 20% tax, recoverable by non-tax payers, with
higher rate taxpayers having to pay more tax.
Where a bond is issued at a deep discount (the issue price lower
than the redemption price), the gain on the discount accrued over
the period held, is charged to income tax.
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Local Authority Bonds are like government issued gilts.
They are short term, in the main one to four years with the rate
of interest fixed at outset. Rates are usually higher than that
offered by gilts and are as secure as the authority issuing them.
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They may be bought and sold on the stock exchange. New bonds are bought from the Authority. The minimum is £1,000 and thereafter in multiples of £1,000.
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Interest is paid net of 20% tax.