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What are gilts?

Archive for October, 2022

What are gilts?

Wednesday, October 19th, 2022

The recent Mini Budget, a £45 billion tax cutting package, paid for by increased public borrowing, led to panic among many investors and a run on Britain’s pension funds. As a result, the Bank of England was forced to step in to stop a collapse by pledging to buy around £65 billion of long-dated gilts.

But what exactly are gilts and why do they matter? For many, the financial jargon that has – justifiably – dominated the headlines in recent weeks is confusing and incomprehensible, so we’ll try to answer these questions in straightforward terms.

UK gilts are fixed-interest securities issued by the British government when it wants to raise funds. They are considered low-risk investments, as the government isn’t likely to go bankrupt, which means they’re likely to be able to pay back the loan in full, plus the interest. 

You can either invest in conventional gilts, with a fixed interest rate or in index-linked gilts, which are linked to the Retail Price Index, meaning their values will rise with inflation. 

So investing in a gilt, or a government bond, is similar to making a loan. But instead of lending to an individual, you’re lending to a business or government.

Investors can then receive a regular income in the form of interest over a set period of time, or this income can be reinvested.

When the gilt reaches maturity, the initial nominal investment is then repaid, along with the proceeds of any reinvested amounts.

How do gilts work?

Each gilt is made up of an issuer, coupon and redemption date. For example:

Treasury stock 4% 2023

The issuer is the UK Government Treasury and the coupon is set at 4% interest on a sum of money (typically £100). The redemption date is set at 2023. 

So if the government wanted to raise, let’s say, £1 million, it would release one hundred thousand gilts at the value of £100 each. If you were to purchase £1,000 worth of these Treasury gilts, you would receive £40 every year until the loan was repaid in 2023.

You’ll usually find that the further away the redemption date, the higher the interest you will receive. 

If you have any questions about the various investment options that are open to you, feel free to get in touch with us, and we’ll be happy to help.


Tax cuts reversed

Wednesday, October 19th, 2022

Jeremy Hunt, the new chancellor, has confirmed that nearly all the tax measures announced in the Growth Plan on September 23rd are to be reversed.

Only the cuts to stamp duty paid on house purchases and the scrapping of the National Insurance hike will continue.

However, all the tax measures that have not started parliamentary legislation will not go ahead.

What has been scrapped?

  • A planned 1p reduction in the basic rate of income tax. This is to be put on hold indefinitely, until economic circumstances allow it to be cut. The Government had announced that it would be cut from 20p in the pound to 19p in the pound in April 2023 – a year earlier than had originally been intended
  • Cuts to dividend tax rates – the 1.25% increase in dividend tax rates was to have been reversed from April 6th
  • The reversal of off-payroll working reforms, also known as IR35 rule changes
  • VAT-free shopping for non-UK visitors
  • The freeze on alcohol duty rates
  • This comes shortly after the government u-turned on its plans to scrap the top income tax rate and freeze corporation tax.

What else has been announced?

Energy Price Guarantee scheme scaled back

The Energy Price Guarantee, which would have capped typical household energy bills at £2,500 annually until 2024, will now only last until April next year.

Mr Hunt also confirmed that the Treasury will lead a review into how households and businesses can be helped with energy bills beyond this point.

The Chancellor said the objective is to “design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need”.

Furthermore, he stated that any support for businesses will be targeted to those most affected, with a focus on incentivising energy efficiency.

Public spending cuts on the way

Mr Hunt announced that all government departments will have to “redouble their efforts” to find savings and that “some areas of spending will need to be cut”.

However, he insisted that its “priority in making the difficult decisions that lie ahead will always be the most vulnerable”, and added he remains “extremely confident” about the UK’s long-term economic prospects.

What happens next?

The market response to the Chancellor’s statement was broadly positive, with the pound rising and government borrowing costs falling following his announcement.

Mr Hunt will then deliver a full Medium-Term Fiscal Plan on October 31st, which will be accompanied by a forecast from the independent Office for Budget Responsibility.

However, the Chancellor’s statement means nearly every element of the Mini Budget has now been scrapped.

The fallout from the Growth Plan announcement on September 23rd has already led to previous Chancellor Kwasi Kwarteng being sacked, and there is now widespread speculation about the political future of Prime Minister Liz Truss, who took office only last month.