Gilts - really basic question

BarnacleMan

Hello kind forumites,

I have a VERY basic question about gilts, but am just looking for a sense check.

I am considering putting a significant chunk of money into short-dated low-yield gilts, e.g. maturing in 2024, because I understand that the capital gain between purchase cost and gilt redemption value is not taxable.

I have share portfolios with a couple of providers and am used to buying and selling shares with these providers, but have no experience at all in buying gilts.

I assume that the way redemption works is that, on or around the redemption date, the gilt vanishes from my account and the face value of the gilt is just deposited in as cash. A bit like a corporate action on shares that returns cash to shareholders.

As far as I can tell that must be how it works; but I just want to be totally sure I'm not missing something, as feels a bit weird to spending a bunch of money on an asset that will vanish in a year or so. Hence the stupid question, but just want a bit of comfort!

While I'm here, I guess I might as well also ask: are there any other obvious pitfalls for a first-time buyer of gilts to avoid?

Thanks in advance!!

GeoffTF

Yes, the proceeds are paid into your account at maturity. The spreads can be wide if you trade online or in small amounts. That would be deadly for gilts that mature in 2024. Retail investors get a rotten deal. For telephone trades of £50K+, the spreads that are generally not too bad for holding to maturity (when you pay only half the spread) in about ten years time, in my experience.

zagfles

GeoffTF said:

Yes, the proceeds are paid into your account at maturity. The spreads can be wide if you trade online or in small amounts. That would be deadly for gilts that mature in 2024. Retail investors get a rotten deal. For telephone trades of £50K+, the spreads that are generally not too bad for holding to maturity (when you pay only half the spread) in about ten years time, in my experience.

Are the spreads different depending on quantity?? The ones I'm looking at seem to quote the same buy/sell spread on several sites, and not dependant on quantity. 

(Of course there's the trading fee charged by the broker on top, which is usually flat, so that can take a chunk out of a small value trade).

aroominyork

I recently invested a large amount in short dated nominal gilts through interactive investor, online. Are you saying I wound have got a better price by phoning them? My trades showed on the LSE website and looked in line with other 'recent trades' at the time.

BarnacleMan

GeoffTF said:

Yes, the proceeds are paid into your account at maturity. The spreads can be wide if you trade online or in small amounts. That would be deadly for gilts that mature in 2024. Retail investors get a rotten deal. For telephone trades of £50K+, the spreads that are generally not too bad for holding to maturity (when you pay only half the spread) in about ten years time, in my experience.

This is super helpful - thank you. It does seem bonkers that the spread is so big on what ought to be one of the most liquid assets out there!

Is it definitely the case that, when tax is factored in, a gilt maturing in 2024 would be a no-go? Just taking the HL online price as an example, a low-yield bond maturing in Jan 2024 would net a capital uplift of about 3.5% at the closing buy price given on HL's website.

Obviously that's not great in itself, but for a savings account to beat that at 45% tax it would need to be paying 6.35%, which doesn't seem likely for a one-year fix any time soon (unless inflation really goes supersonic!). It's interesting that you're saying I might get a better deal on the telephone - would that be the case across most brokers? I would probably be looking to invest about £200k.

Many thanks again for your thoughtful response.

BarnacleMan

(Although I guess that, since the actual hold time would be a year and three months, that is getting fairly close to equivalent yield as a post-tax one-year fix.)