Share Prices & Company Research


21 November 2023

Gilts Explained: How do UK government bonds work?

Gilts Explained: How do UK government bonds work?
In this video, James Igoe, Investment Manager at Redmayne Bentley discusses UK Government bonds with Laura Hutchinson, of Forbes Dawson.

What is a UK government bond?
For anybody who is unfamiliar with government bonds, also known as gilts, they are effectively a loan to the government.
You can loan this money over different periods of time ranging anywhere from one month to more than 50 years. In return, investors are paid a fixed return for each year the bond is held. 

They are issued to help the government finance major projects and initiatives. The length of time in which a gilt matures is included in the name, so if a UK Government bond issued today is due to mature in two years it is called a two-year gilt. It is important to remember that no investment is without risk and you could get back less than you invested.

Are UK government bonds a good investment?
What qualifies as a good investment will vary according to the individual, their long-term plans and preferences with regards to risk, alongside other factors.

There’s always a risk that the government defaults on its debt. Although, it is argued that this risk is underpinned by the fact the government is able to print its own money.

High inflation can have an impact, as the amount you get back may be worth less due to inflation.

Do you pay tax on a UK government bond?
The features of a government bond mean that, depending on which one you own, your rate of tax on the return can be moderate when compared to the tax paid on a UK bank account.

When profit is received as a result of making a trade, you may be subject to Capital Gains Tax, this is not the case for gilts under the current legislation. However, they are subject to Income Tax, unless they are held within a tax-free wrapper (such as an ISA). 

Looking back to 2021. government bonds were returning between 0.5% and 1.5%. However, at the time of writing, government bonds are returning 3.5-5% a year.

How safe are UK government bonds?
Gilts can be considered a low-risk investment opportunity, however it is always important to seek independent financial advice and consider individual circumstances.

The Financial Services Compensation Scheme (FSCS), which presently offers an £85,000 protection cap, offers additional protection for those who choose cash savings as an alternative. Please note, this could change if the bank ceases to trade and you should check whether savings are protected by the FSCS scheme.

Government bonds and interest rates
Government bonds will often be considered as part of a diversified portfolio. For some, locking into a fixed rate for three years, or five years, may be quite appealing depending on interest rates at the time.

For clients with money in the bank, not locked into a fixed rate, if interest rates were to fall, the rate of interest they receive could also fall.

Again, it’s important to consider goals and how these may differ, because if interest rates increase, locking in a return might be considered a disadvantage. So, it’s always worth seeking professional advice before taking any further steps.

How do you buy UK government bonds?
In simple terms, the government gives banks and financial organisations the chance to bid for them. They can then offer these for sale to buyers such as individual investors, pensions funds and others. Individual investors can access Government Bonds through many FCA regulated wealth management and stockbroking businesses.

For further information, contact Redmayne Bentley.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance.

Please note that tax treatment depends on the specific circumstances of each individual and may be subject to change in the future.
Gilts Explained: How do UK government bonds work?
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