In our weekly series, readers can email any question about their finances, to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot Financial Planning and has worked in financial service for 25 years. If you have a question for her, email us at [email protected]
Question: I’ve heard that short-term gilts are a really good investment at the moment. I have a DIY stocks and shares ISA and was wondering if I should get some within it. Is it a good idea, and how I do go about getting them, and knowing exactly what to get?’
Answer: Gilts are one of those financial terms that can sound complicated, but the concept is actually quite simple. Essentially, gilts are bonds (essentially IOUs) issued by the UK Government to raise money.
They date back to the late 17th century when they were used to fund wars, and over time, they have become a staple of conservative investing.
The bonds became known as gilts because the certificates had gilt edges to them. When you buy a gilt, you’re essentially lending money to the government in return for regular interest payments (the coupon) and a promise to repay the face value at maturity.
The attractiveness of gilts comes and goes. Sometimes they offer compelling returns, and other times, by the time you’ve decided to invest, the appeal has already started to fade.
Right now, short-term gilts are getting attention because they are trading below their face value due to the recent period of rising interest rates. However, before you decide to buy them within your Stocks and Shares ISA, there are a few things to consider.
Firstly, there is little benefit to holding gilts within an ISA. Gilts are exempt from capital gains tax (CGT) when held directly in a General Investment Account (GIA), so the ISA wrapper doesn’t add any extra tax efficiency.
This means that for many investors, particularly higher and additional rate taxpayers, it makes more sense to hold them in a GIA rather than using up valuable ISA allowance.
Higher and additional rate taxpayers stand to benefit the most from gilts issued at a discount.
Because these gilts have low coupons but trade below their redemption value, the bulk of the returns come from capital gains rather than income. For example, a gilt maturing in July 2027 with a face value of £100 may currently trade at around £92.50.
While it offers a low coupon of just 0.75 per cent, the investor buying at today’s price is assured of a capital gain when it redeems at £100 in 2027. Since gilts held directly in a General Investment Account (GIA) are exempt from CGT, this gain is tax-free, making them a highly efficient option for those looking to generate returns without increasing their income tax burden.
For example, consider someone approaching retirement who wants to keep a portion of their investments relatively low risk while still earning a return. Instead of leaving a large sum in cash, which would erode in value due to inflation, they could allocate a portion of their portfolio to short-term gilts.
This would allow them to preserve capital while benefiting from tax-free capital gains when the gilts mature, ensuring they have access to funds when needed.
That is another advantage of short-term gilts is their liquidity. For investors who may need access to their money within a few years, gilts provide a relatively safe place to park cash while still earning a return.
This makes them useful for managing market exposure, especially for those who are holding significant sums in cash but want to avoid immediate capital risk while retaining flexibility for future opportunities.
However, as with any investment, timing is key. The appeal of gilts fluctuates based on interest rate expectations and market conditions.
If you’re considering investing, it’s worth keeping an eye on how yields are moving and how long-term interest rate trends are evolving. The Bank of England’s decisions on rate cuts or hikes will have a direct impact on gilt pricing and returns, so staying informed on monetary policy is important.
So, should you buy gilts within your ISA? For most investors, the answer is no. The ISA wrapper doesn’t add much value for gilts, and for higher earners, holding them in a General Investment Account (GIA) is often the better option.
If you’re looking for a way to generate relatively safe, tax-efficient returns and don’t need immediate access to your funds, short-term gilts could be a strong addition to your investment strategy – but only if you’re aware of how quickly their attractiveness can shift.
If you’re unsure, speaking with a financial adviser can help you decide whether gilts fit within your broader investment goals and tax planning strategy.
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