Understanding UK Gilts: A Guide for Personal Investors and Limited Companies

Chris Broome – Chartered Financial Planner

UK gilts are government bonds issued by HM Treasury to raise money for public spending. They are considered one of the safest investment options in the UK due to the backing of the British government.

But how do gilts work, and what should you know as a personal investor or a limited company?

When you invest in a gilt, you are essentially lending money to the government in exchange for a fixed interest payment (known as the “coupon”) and repayment of the principal at maturity. They are a popular choice for those seeking steady returns and capital security.

Investing as a Personal Investor

1.  Tax Treatment:

  • Income Tax: Interest earned from gilts is taxable as income. However, UK gilts are unique in that the interest is paid gross, meaning no tax is deducted at source.
  • Capital Gains Tax (CGT): One major advantage of gilts is that they are exempt from CGT for individuals. This makes them attractive for investors seeking tax-efficient options for their portfolio.

2.  Investor Guarantees:

  • The government guarantees the repayment of both interest and principal. This makes gilts highly secure, as the UK government has never defaulted on its debt.

3.  Other Considerations:

  • Liquidity: Gilts are highly liquid and can be bought or sold on the secondary market with ease.
  • Inflation Risk: The fixed coupon payment may lose purchasing power during periods of high inflation unless you invest in index-linked gilts, which adjust payments based on inflation rates.

Investing as a Limited Company

1.  Tax Treatment:

  • Corporation Tax: For companies, gilt interest is treated as taxable income and subject to corporation tax.
  • Capital Gains Tax (CGT): Unlike personal investors, companies are not exempt from CGT on gilts. Any capital gains realised on selling gilts would need to be included in their corporation tax computations.

2.  Investor Guarantees:

  • As with individuals, gilts offer a government-backed guarantee on principal and interest, providing a stable investment option for corporate cash reserves.

3.  Other Considerations:

  • Strategic Use: Companies may use gilts as part of treasury management strategies to earn a return on surplus cash while maintaining liquidity and minimising risk.
  • Accounting: Companies must account for gilts on their balance sheets, and valuation changes may need to be recognised depending on the accounting standards followed.

Key Points to Note for All Investors

  • Market Value: Gilt prices can fluctuate based on interest rate changes. If sold before maturity, the value may differ from the purchase price.
  • Yields: The yield on a gilt reflects its return and is inversely related to its price. Higher interest rates in the economy can push gilt prices down, increasing yields for new investors.
  • Types of Gilts:
    • Conventional Gilts: Pay a fixed coupon and repay the principal at maturity.
    • Index-Linked Gilts: Adjust both the coupon and principal for changes in the Retail Price Index (RPI), offering inflation protection.
  • Minimum Investment: Investors can purchase gilts via the Debt Management Office (DMO) or on the London Stock Exchange, with varying minimum investment thresholds.

Are Gilts Right for You?

For personal investors, gilts offer tax advantages (no CGT) and a secure income stream, making them ideal for risk-averse individuals or those nearing retirement.

Limited companies can benefit from the stability and predictability gilts provide, although they must carefully consider the tax implications and accounting requirements.

Final Thoughts

Investing in UK gilts is a straightforward way to diversify your portfolio, achieve steady income, and protect capital. However, whether you’re a personal investor or a limited company, it’s essential to consider your broader financial goals, tax position, and investment timeline.

If you’d like tailored advice on how gilts could fit into your financial strategy, feel free to get in touch. We’re here to help you make confident, informed decisions.

Please note:

The content of this blog is intended for general information purposes only.

Tax planning is not regulated by the Financial Conduct Authority.