What are gilts? A guide to UK government bonds

If you are looking for regular income from your investments, gilts may be worth considering.

Backed by the UK government, they can play a useful role in a financial plan but understanding how they work is important before you invest.

Gilts are government bonds. Buying one means lending money to the government in return for interest payments and repayment at an agreed maturity date. However, government backing does not mean their market value cannot fall or that you will always recover the amount you invested.

Understanding gilts

A conventional gilt pays a fixed amount of interest, known as its coupon, throughout its life.

At maturity, the government repays its face value, also called its nominal value.

That distinction matters. Gilts trade on the market, so the price you pay may be above or below their face value. The repayment at maturity is therefore not necessarily the same as your original investment.

The coupon alone does not tell you your overall return. You also need to consider the purchase price, the amount repayable at maturity, any charges and your tax position.

What gilts could offer you

For investors seeking a more predictable income, conventional gilts provide a known schedule of interest payments. They may help supplement other income or form part of a plan for meeting future spending needs.

They can also help diversify a portfolio alongside other investments. However, diversification does not remove the risk of losses, and the appropriate balance will depend on your circumstances.

Gilts can usually be sold before maturity if your plans change. The amount you receive will depend on the market price at the time, which could be less than you paid.

Choosing a gilt

Gilts have different maturity dates, allowing investors to consider shorter or longer investment periods. Matching a maturity date to when you expect to need the money can be useful, although you should also allow for unexpected expenses.

Longer-dated gilts generally experience greater price movements when interest rates change. Choosing a gilt therefore involves more than finding an appealing coupon: the time until repayment and your ability to hold it matter too.

Understanding the risks

Gilts are generally considered to have low default risk because they are backed by the UK government. They are not, however, risk-free investments.

Interest rate risk

When market interest rates rise, the price of existing conventional gilts generally falls. If you need to sell before maturity, this can result in a loss.

Inflation risk

Inflation can also reduce the purchasing power of fixed interest payments and the capital repaid.

Index-linked gilts adjust their interest payments and repayment value in line with the Retail Prices Index, subject to a time lag. This offers a link to inflation, but their market prices can still fluctuate significantly. They should not be viewed as a risk-free alternative to cash.

Considering tax

For individual investors, gains on UK gilts held directly are exempt from Capital Gains Tax. Interest payments can still be subject to Income Tax, depending on your circumstances and how the investment is held.

Investing through a gilt fund is different from holding gilts directly, and the same Capital Gains Tax exemption does not automatically apply to your fund investment. Tax treatment depends on individual circumstances and may change.

Are gilts suitable for you

Gilts may suit some income and financial planning needs, but they are not an appropriate choice for everyone. Your wider investments, attitude to risk, tax position and the time before you need your money all matter.

At Continuum, we can help you understand these trade-offs and consider whether gilts could have a place in your financial plan.

Speak to your adviser to explore the options.

This article is intended for general guidance only and is based on the opinion of Continuum it does not constitute financial advice. Individual circumstances vary, and you should consider seeking advice from a regulated financial adviser before making any decisions about your Savings, Investments, or retirement planning.

The value of an investment can go down as well as up, and you may get back less than you originally invested. When investing Capital is at risk.

The Financial Conduct Authority does not regulate taxation advice.