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UK Government bonds, commonly known as Gilts, offer fixed and floating interest rates and are backed by the UK government. In this article, we explore the importance of Gilts in the UK’s financial ecosystem, their benefits and why they are currently capturing investor interest. 

Historically, Gilts have been relatively low-risk in nature and have been sought after by risk-averse investors. They play an essential role in financing the government’s operational needs in times of budget deficit. 


Appealing to risk-averse investors

For investors with a low appetite for risk, Gilts offer an investment that is backed by the government and provides a predictable return and fixed income stream. 

Set a benchmark for pricing and interest rates

Gilts serve as a benchmark for pricing other fixed-income securities in the UK. The yields on Gilts are closely monitored and used as a reference point for setting interest rates on various financial products, including corporate bonds.

Liquidity and diversification

Investors can easily buy or sell Gilts without significantly impacting their market prices. They also diversify an investment portfolio, as their performance often differs from equities and other asset classes.

Why now? 

The UK Gilt yield rate has risen in the past few months, resulting in a drop in the price of Gilts. Rising global rates, the end of the Bank of England's gilt crisis buying programme, increased supply in the market, and muted demand from pension schemes are all factors that have contributed to this rise. 

With high yields (~4.48%) and favourable tax treatment, Gilts have become increasingly trendy. The rising yields have captured investor interest even though the demand is not as high as savings.

What is the tax treatment? 

In addition to the potential for higher yields, Gilts offer tax benefits to investors. If held within an Individual Savings Account (ISA) or Self-Invested Personal Pension (SIPP), investors do not have to pay taxes on their Gilt bond holdings. For those who hold Gilts in a regular savings account, tax is only levied on the capital gains realised, while the interest payouts or coupons remain tax-free.


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Disclaimer - WealthKernel is not authorised to provide financial advice. This information does not constitute financial advice or a recommendation. If investors are unsure about any element of their financial situation, they should seek independent professional advice for their circumstances or needs. 

Tax treatment depends on individual circumstances and may be subject to change in the future.

When investing capital is at risk, the value of investments can go up or down. Investors may get back less than they put in and lose all of the initial investment.