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How to make the government pay you 5.9%
Gilt yields are at their highest since 1998, and the tax treatment makes some of them better than any savings account.
In brief
Gilt yields are at their highest since 1998, and the tax treatment makes some of them better than any savings account. Old low-coupon gilts trading far below £100 hand you a capital gain that is free of capital gains tax, which is why a 0.125% bond can beat a 6% savings account. Originally reported by Dailymail.
The government owes trillions
UK borrowing is close to £3trillion and climbing. Chancellor John Healey is set to borrow about £115 billion this year alone, two and a half times what the Exchequer needed a decade ago.
What a gilt actually is
The government raises that cash by selling bonds called gilts, named for the gold edging on the old paper certificates. They run from a few months to 50 years and pay interest twice a year.
The safest borrower around
Most gilts are issued at £100, the par value, and the interest rate is called the coupon. The UK has never once failed to repay a gilt.
Why investors got nervous
Big investors are uneasy about a new and untested PM making rash promises, rising defence spending and inflation pushing up costs across government.
Nerves mean higher rates
Five years ago the state paid under 1 per cent on 30-year gilts. Today it is more than 5.9 per cent, the highest since 1998. Ten-year money costs around 5.3 per cent.
Prices move, coupons don't
The coupon is fixed for life, but gilts trade daily like shares. Divide the coupon by the price and you get the yield, so when prices fall, yields rise.
The tax-free kicker
A 2056 gilt paying 5.375 per cent has been pushed down to £92.60. Gilts are exempt from capital gains tax, so the gain back up to £100 at maturity is yours in full.
“gilts are exempt from capital gains tax, providing a neat little bonus for canny savers”
Covid bonds are the bargain
The state issued mountains of gilts when rates were near zero, so the market is full of bonds with coupons of 0.5 per cent or less, all trading at deep discounts.
Beating the bank easily
A 0.125 per cent gilt maturing in January 2028 costs £94.40, so you pocket £5.60 tax-free at maturity. AJ Bell's Ryan Hughes puts the gross equivalent yield at 6.8 per cent for a higher-rate taxpayer.
“This compares very favourably with a fixed-rate cash account.”
The 35-year moonshot
A 0.5 per cent gilt maturing in 2061 trades at just £21.90, promising an £88.10 tax-free gain at maturity. Not for everyone, but useful if you are investing for children or grandchildren.
The bottom line
Old low-coupon gilts trading far below £100 hand you a capital gain that is free of capital gains tax, which is why a 0.125% bond can beat a 6% savings account.
