A couple of simple gilt questions.. I think!

Johnjdc

Delburn said:

A guess is that the apparent discrepancy has something to do with TY25 being a recent issue.  It was first issued in Jan 23 and there have been a couple more recent auctions by the DMO.  No other 2025 gilts have been auctioned by the DMO this year.

Maybe the market makers are holding a lot of this stock, the market is trying to force the government to pay a premium for new borrowing, and/or the other 2025 gilts are held by less active, buy and hold investors.

Yes the most logical explanation is that it postdates Covid quantitative easing and is too short a maturity for Truss-panic market operations - so the price isn't "manipulated" by the Bank of England holding loads of it for either of those reasons.

I'd just expect the market to be rational enough and deep enough to close that gap, if that's the only explanation!

easysaver

ChilliBob said:

I suspect a lot of people are interested in gilts for the tax purposes, if it wasn't for thay I think it'd stick to fixed rates instead, it's easier for sure. 

Gilts are currently CGT free. Emphasis on currently. Why wouldn't the govt bring Gilts within the scope of CGT to raise much needed tax revenue?... especially in this increasing yield environment.

ChilliBob

easysaver said:

ChilliBob said:

I suspect a lot of people are interested in gilts for the tax purposes, if it wasn't for thay I think it'd stick to fixed rates instead, it's easier for sure. 

Gilts are currently CGT free. Emphasis on currently. Why wouldn't the govt bring Gilts within the scope of CGT to raise much needed tax revenue?... especially in this increasing yield environment.

Interesting, I hadn't considered that. I guess eith short duration you lower this risk considerably. If you're taking one of the 2073 bonds then yeah, who knows what the deal will be by then! 

easysaver

ChilliBob said:

easysaver said:

ChilliBob said:

I suspect a lot of people are interested in gilts for the tax purposes, if it wasn't for thay I think it'd stick to fixed rates instead, it's easier for sure. 

Gilts are currently CGT free. Emphasis on currently. Why wouldn't the govt bring Gilts within the scope of CGT to raise much needed tax revenue?... especially in this increasing yield environment.

Interesting, I hadn't considered that. I guess eith short duration you lower this risk considerably. If you're taking one of the 2073 bonds then yeah, who knows what the deal will be by then! 

Gilts are growing in (retail) popularity with increasing yields, fiscal drag bringing more and more people into higher marginal tax rates, and the savings allowance being eaten up by less capital as interest rates rise. I hope they remain a niche product to avoid the glare of the Chancellor!
I know it's not comparable but remember they changed the indexing (from 2030) on linkers from RPI to CPI without compensation.

Doctor_Who

easysaver said:

ChilliBob said:

I suspect a lot of people are interested in gilts for the tax purposes, if it wasn't for thay I think it'd stick to fixed rates instead, it's easier for sure. 

Gilts are currently CGT free. Emphasis on currently. Why wouldn't the govt bring Gilts within the scope of CGT to raise much needed tax revenue?... especially in this increasing yield environment.

Tax law can and does frequently change, so this is possible. My understanding is that gilts have been free of CGT since 1969, so that's many different Conservative and Labour governments that could have made the change, but didn't. Capital taxes are a relatively minor proportion of total taxation (see below, taken from the House of Commons Library), hence to raise 'much needed tax revenue' this is normally done by the top 3 of income tax, NICs and VAT. There are many other 'tax perks' that the government might also change - higher rate tax relief on pension contributions has been talked about for years, and recently ISAs were in the spotlight. My attitude is whilst 'tax perks' are available I'll use them!

wmb194

easysaver said:

ChilliBob said:

I suspect a lot of people are interested in gilts for the tax purposes, if it wasn't for thay I think it'd stick to fixed rates instead, it's easier for sure. 

Gilts are currently CGT free. Emphasis on currently. Why wouldn't the govt bring Gilts within the scope of CGT to raise much needed tax revenue?... especially in this increasing yield environment.

Highly unlikely because the flip side is that if you buy them above par you would be able to reliably manufacture capital losses. My understanding is this is why they were made CGT free in the first place i.e. people were making capital gains from other assets including equities and then negating their gains by buying gilts above par and holding them to maturity and the Treasury was losing CGT revenue.

Doctor_Who

wmb194 said:

Highly unlikely because the flip side is that if you buy them above par you would be able to reliably manufacture capital losses. My understanding is this is why they were made CGT free in the first place i.e. people were making capital gains from other assets including equities and then negating their gains by buying gilts above par and holding them to maturity and the Treasury was losing CGT revenue.

I didn't read the whole of the debate from July 1969 in Hansard, but your explanation makes perfect sense.

easysaver

wmb194 said:

easysaver said:

ChilliBob said:

I suspect a lot of people are interested in gilts for the tax purposes, if it wasn't for thay I think it'd stick to fixed rates instead, it's easier for sure. 

Gilts are currently CGT free. Emphasis on currently. Why wouldn't the govt bring Gilts within the scope of CGT to raise much needed tax revenue?... especially in this increasing yield environment.

Highly unlikely because the flip side is that if you buy them above par you would be able to reliably manufacture capital losses. My understanding is this is why they were made CGT free in the first place i.e. people were making capital gains from other assets including equities and then negating their gains by buying gilts above par and holding them to maturity and the Treasury was losing CGT revenue.

Excellent. I'm somewhat reassured. However, I guess there's nothing to stop the offset of losses against gains only from other gilts. Perhaps reminiscent of peer to peer bad debt that may only be offset againt income from other peer to peer loans. In fact, come to think of it why wasn't this ringfencing of CGT on gilts introduced at the time?

zagfles

wmb194 said:

easysaver said:

ChilliBob said:

I suspect a lot of people are interested in gilts for the tax purposes, if it wasn't for thay I think it'd stick to fixed rates instead, it's easier for sure. 

Gilts are currently CGT free. Emphasis on currently. Why wouldn't the govt bring Gilts within the scope of CGT to raise much needed tax revenue?... especially in this increasing yield environment.

Highly unlikely because the flip side is that if you buy them above par you would be able to reliably manufacture capital losses. My understanding is this is why they were made CGT free in the first place i.e. people were making capital gains from other assets including equities and then negating their gains by buying gilts above par and holding them to maturity and the Treasury was losing CGT revenue.

But why would anyone do that, if they're above par then they'll have a high coupon, so you make a capital loss but you'll receive taxable interest instead. Usually interest is taxed more heavily than capital gains. There might be some niche scenarios it'd work eg using the savings starting rate but I'd have thought that would be negligible as a tax avoidance ploy.

wmb194

zagfles said:

wmb194 said:

easysaver said:

ChilliBob said:

I suspect a lot of people are interested in gilts for the tax purposes, if it wasn't for thay I think it'd stick to fixed rates instead, it's easier for sure. 

Gilts are currently CGT free. Emphasis on currently. Why wouldn't the govt bring Gilts within the scope of CGT to raise much needed tax revenue?... especially in this increasing yield environment.

Highly unlikely because the flip side is that if you buy them above par you would be able to reliably manufacture capital losses. My understanding is this is why they were made CGT free in the first place i.e. people were making capital gains from other assets including equities and then negating their gains by buying gilts above par and holding them to maturity and the Treasury was losing CGT revenue.

But why would anyone do that, if they're above par then they'll have a high coupon, so you make a capital loss but you'll receive taxable interest instead. Usually interest is taxed more heavily than capital gains. There might be some niche scenarios it'd work eg using the savings starting rate but I'd have thought that would be negligible as a tax avoidance ploy.

That was the story. Prevailing interest rates and CGT, income tax, corporation tax and whatever else individuals, companies, funds and institutions pay have varied greatly over time and the numbers may have worked better in some decades and scenarios than others. 

It still hasn't been reversed and the current scenario of below par gilts with small coupons has created the opportunity to effectively earn interest tax free by making it a guaranteed CGT-free capital gain. I don't suppose the Treasury ever had this in mind, hah hah!