Gilts

FAQs

What is a gilt?

A gilt is a sterling-denominated bond issued by the UK government to raise funds.

When you buy a gilt, you are lending money to the UK government. In return, the government promises:

Regular interest payments: known as the “coupon” or a dividend, these are paid every six months at a known fixed rate.
Repayment at maturity: the face value, or nominal amount, of the gilt is repaid on the maturity date.

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For example, if you hold £1,000 nominal of a 1½% gilt that matures in 2047, you would receive £7.50 every six months until 2047, at which point the government also repays the £1,000 principal alongside the final dividend.

As gilts are issued by the UK government, they are more secure than corporate bonds.

While no investment is completely risk-free, gilts are considered very low risk due to the UK government’s strong credit history. To date, the British government has never failed to make interest or principal payments on gilts. Though it’s important to remember that past performance is not a reliable indicator of future returns.

However, gilt market prices can still fluctuate, which may affect returns.

What types of gilts are there?

Conventional gilts: Provide fixed semi-annual interest payments.

‍Index-linked gilts: Adjust payments based on inflation as measured by the Retail Prices Index (RPI).

Only conventional gilts are available on Freetrade.

What’s the difference between the nominal amount of a gilt and the price of a gilt?

Nominal amount: this is the face value of a gilt. It represents the amount that will be repaid to the holder at maturity, and is also used to calculate the dividend payment.

‍Price of a gilt: this is the current market price at which the gilt can be bought or sold. It can differ from the nominal amount and is influenced by factors such as interest rates, inflation expectations, and demand for gilts.

For example, a gilt with a nominal value of £100 might trade at £95 if market interest rates have risen or at £105 if market interest rates have fallen. Learn more about what impacts the market price of gilts here.

It’s also important to understand clean vs dirty pricing when it comes to gilts.

The price quoted on Freetrade’s instrument screens is what’s known as the clean price. It reflects just the bond’s market value.

However, when you’re buying a gilt, you also have to compensate the seller for any interest that has accrued on the gilt since their last dividend payment.

So what you actually end up paying is what's known as the dirty price, which is essentially the clean price + any interest accrued since the last dividend date. You’ll see a breakdown of the estimated dirty price, including interest accrued, on the Confirm buy screen.

Interest on gilts accrues on a daily basis between one dividend date and the next.

For example:

Assume 1% Treasury Gilt 2032 pays interest on 31 January and 31 July each year, and is currently trading at a price of £0.80 per £1 nominal
If you wish to purchase the equivalent of £100 nominal, the clean price will be £80 (£0.80 x £100)
If the trade settles on 31 August, you need to compensate the seller for 31 days accrued interest, which is the number of days since the last dividend date.

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This amount is calculated as follows:

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Here, 184 is the number of calendar days between 31 July and the next dividend date, 31 January.

So, while the clean price of your purchase is £80, you would actually pay £80.08 (£80 clean price + £0.08 accrued dividend), which is known as the dirty price.

What impacts the market price of gilts?

Gilt prices are impacted by a number of things, including the outlook for interest rates and inflation, as well as the market demand for gilts.

To understand this, it’s important to note that newly issued gilts generally have their dividend (interest rate) set close to the prevailing market interest rate at the time of issuance.

So, when interest rates fall, gilt prices usually go up. This is because the fixed interest offered by the gilts will become relatively more attractive compared with prevailing interest rates in the market.

Conversely, if market interest rates rise, gilt prices typically fall. This is because their fixed dividend becomes less attractive compared to prevailing market interest rates. As a result, an investor would want to pay less for the gilt to ensure their resulting yield is more in line with market rates.

Gilts with longer maturity are more sensitive to interest rate changes. This means their market prices can be more volatile than short-term gilts.

Gilt prices can also be impacted by inflation. Higher inflation erodes the purchasing power of the fixed dividend payments and the principal repayment, making gilts less attractive. When inflation rises, gilt prices often fall.

How are gilt prices quoted?

With Freetrade, you can buy or sell as little as one share of a gilt. One share equates to £1 of nominal value.

This means the gilt prices on Freetrade are quoted per £1 of nominal value. Elsewhere in the market, you may see gilt prices quoted per £100 of nominal value, so it’s important you are comparing apples to apples.

The price reflects the market value of the gilt share, not the face value or nominal amount. The price can fluctuate based on market conditions, such as interest rates, inflation expectations, and demand.

How are gilts different from other bonds?

Gilts are bonds issued specifically by the UK government. This makes them more secure than corporate bonds.

While no investment is completely risk-free, gilts are considered very low risk due to the UK government’s strong credit history. To date, the British government has never failed to make interest or principal payments on gilts. Though it’s important to remember that past performance is not a reliable indicator of future returns.

However, gilt market prices can still fluctuate, which may affect returns.

What is the difference between the dividend, the running yield, and the yield-to-maturity?

Dividend: Also known as the coupon, this is the fixed annual interest rate paid to gilt holders, expressed as a percentage of the gilt’s face value. The rate is quoted annually, but paid semi-annually.

‍Running yield: The annual dividend divided by the current market price of the bond.

‍Yield-to-maturity (YTM): The actual annual return an investor receives if the gilt is purchased at the current market price and held until maturity. As gilt prices rise, yields fall, and vice versa.

What are the tax implications of investing in gilts?

Income Tax: dividends are subject to Income Tax, unless the gilts are held in an ISA or SIPP.

‍Capital Gains Tax: capital gains from selling gilts or gilts reaching maturity are not subject to Capital Gains Tax.

‍Stamp Duty Reserve Tax: gilt transactions are not subject to Stamp Duty Reserve Tax.

Who can trade gilts on Freetrade?

Gilts are available to Standard and Plus customers, and can be held in a GIA, ISA, or SIPP.

Why invest in gilts?

Investors may choose gilts for:

Safety: Backed by the UK government.
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Predictable income: Fixed semi-annual dividend payments.
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Tax efficiency: Exempt from Capital Gains Tax.

Diversification: Add stability to a portfolio.

Are gilts risk-free?

While no investment is completely risk-free, gilts are considered very low risk due to the UK government’s strong credit history. To date, the British government has never failed to make interest or principal payments on gilts. Though it’s important to remember that past performance is not a reliable indicator of future returns.

However, gilt market prices can still fluctuate, which may affect returns. Other risks to be aware of when buying gilts include:

Interest rate risk. When interest rates rise, gilt prices fall. This is because new gilts with higher yields become more attractive, reducing the market value of existing gilts. This particularly impacts long-term gilt holders, as longer-dated gilts are more sensitive to interest rate changes.
Inflation risk. Inflation can reduce the purchasing power of future dividends and the repayment of the face value of the gilt at maturity.
Credit risk: While, to date, the British government has never failed to make interest or principal payments on gilts, it is important to remember that past performance is not a reliable indicator of future returns.
Opportunity cost: The fixed returns on gilts may be lower than returns on other investments like equities or corporate bonds, especially during periods of economic growth. By holding gilts, investors might miss out on higher returns elsewhere.
Liquidity risk: If there’s low demand for a particular guilt in the market, the holder may be unable to sell it and will need to hold it until maturity.
Reinvestment risk: The risk of reinvesting proceeds from dividend payments or maturing gilts at lower interest rates.

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While gilts are considered lower risk than many other investments, understanding these risks may help you decide if gilts align with your financial goals and risk tolerance.

Are gilts the same as UK Treasury bills?

No, though there are some similarities:

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Both gilts and UK Treasury bills are issued by the UK government, making them low-risk investments.
Both are denominated in GBP.
Both represent a form of government borrowing, where investors lend money to the government in exchange for future repayment.
Both can be used to generate income for investors, although in different forms.

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Differences between gilts and UK Treasury bills:

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Maturity:
- Gilts: Long-term securities with maturities that can range from a few years to several decades (up to 50 years or more).
- Treasury bills: Short-term securities with maturities of one year or less (usually 1, 3, 6, or 12 months).

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Dividend payments:
- Pay regular dividends (coupons) every six months, based on a fixed percentage of the nominal value, until maturity.
- Treasury bills: Treasury bills do not pay dividends. They are zero coupon bonds.

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Price behaviour:
- Gilts: Sold at market prices that can fluctuate based on interest rates and other market factors. The return is from both the dividends and the return of the principal at maturity.
- Treasury bills: The return comes from the UK government repaying the amount you originally invested, plus a fixed return after a known period.

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Tax:
- Gilts: Dividend payments are subject to income tax unless held in an ISA or SIPP. Capital gains from selling gilts or from gilts maturing are generally exempt from capital gains tax.
- Treasury bills: Income from Treasury bills (the difference between purchase price and maturity value) is subject to income tax, unless held in an ISA or SIPP.

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Investment purpose:
- Gilts: Often used by investors seeking long-term, stable income with periodic dividend payments, or for those looking to balance long-term portfolios.
- Treasury bills: Typically used for short-term investment strategies or as a safe option for cash management.

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Ways to buy:
- Gilts: Have a well-established secondary market and are actively traded on the London Stock Exchange.
- Treasury bills: Issued through weekly competitive tenders held by the UK Debt Management Office (DMO).

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Can I redeem my gilt earlier than the maturity date?

No, you can only redeem a gilt once it reaches its maturity date. However, you can sell it at any time, the way you would with an equity or ETF.

On my contract note, there is a negative value for ‘Accrued interest’ or ‘Days interest’. Why is it negative?

When you’re buying a gilt, you have to compensate the seller for any interest that has accrued on the gilt since their last dividend payment.

Most of the time, accrued interest is a positive value.

However, if a gilt settles during the ex-dividend period, an accrued interest adjustment happens to avoid double counting. This results in a negative value on the contract note.

The ex-dividend period is the seven business days leading up to the dividend payment date.

The adjustment happens because the seller receives the full dividend payment, but part of that payment was technically earned by the buyer during their holding period.

This accrued interest adjustment is mandated by HMRC to avoid double counting interest.

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