Short Term Gilts

Aminatidi

I'm trying to wrap my head around gilts in an unwrapped account.

Let's say I have £100K so I buy £100K of TN24.

The coupon is 0.125% so for every £100K of TN24 that I buy at "par" I have I make a massive £125.

But I'm not paying "par" price for the gilt I'm paying less (around £97.70 as of today) so there's a capital gain between what I pay and the "par" value of £100 and that gain is entirely tax free?

What I'm trying to work out here is basically if I can "do a Buffett" and have some of my portfolio in 100% bulletproof (unless the UK goes bust) "T Bill" equivalent UK short term government gilts.

The safest way do do that seems to be directly owned gilts rather than a fund or ETF and with the "right" gilt it minimises tax as much as possible because the gain is almost all capital gain which is tax free on gilts rather than from income which is taxable depending on the amount.

Have I understood correctly?

Doctor_Who

Most of the gain in short term/low coupon gilts come from the capital gain when held to maturity and not the coupon. Outside a tax wrapper the capital gain is free of tax, but the coupon isn't - so there is likely to be a small amount of tax depending on your other income. I hold TN24 and TN25, the prices recently have been less attractive than they were a month or so ago.

Aminatidi

Yes I'm trying to understand if there's a calculators somewhere that can split out the income and the capital gain.

Presume as these gilts get closer to maturity combined with interest rate changes there's simply less gain to be made?

I wouldn't pretend to understand it too much I'm just trying to work out if I'm thinking along the right lines.

Doctor_Who

The calculations aren't difficult. For TN24 per £100 of gilt the coupon (0.125%) is 12.5p per year (paid as 6.25p twice a year), effectively it can be ignored. The gain is just the difference between the price you pay (currently ~£97.68) and the maturity price (£100). You also need to understand the accrued interest since the last coupon payment as that will be a cost when buying. TN24 only has ~6 months remaining to maturity and barring any financial shock (think last September) you would expect it to trend upward towards the maturity value. More info in the links below:

https://www.dividenddata.co.uk/uk-gilts-prices-yields.py
https://www.dmo.gov.uk/responsibilities/gilt-market/about-gilts/

Aminatidi

Thank you  As a retail investor is there any way to get safer "cash" equivalents whilst generating some return?

From what I understand as retail investors we can't buy short dated gilts via a platform except in a OEIC or ETF.

InvesterJones

Aminatidi said:

Thank you  As a retail investor is there any way to get safer "cash" equivalents whilst generating some return?

From what I understand as retail investors we can't buy short dated gilts via a platform except in a OEIC or ETF.

No you can, just depends on the platform. https://forums.moneysavingexpert.com/discussion/6431214/best-way-to-buy-and-own-gilts-as-a-retail-investor#latest

Doctor_Who

I buy gilts through my investment platform (Interactive Investor) and I think some other platforms also allow the purchase of gilts (HL and maybe iWeb, not 100% sure about the latter), although you might have to phone to buy them.

Aminatidi

Yeah HL and lots of others platforms do this but you don't seem able to buy really short (1 month to 3 month for example) that way.

Not saying that's an issue but they seem to exist and be available to financial institutions.

Doctor_Who

On the DMO website for nominal gilts there are only 2 gilts with maturity dates of less than 6 months (7 Sept 2023 and 31 Jan 2024 (TN24)).

Aminatidi

I think I'm using the term "gilt" for what is actually a UK treasury bill.  And it seems that the public can't buy those.

aroominyork

Yes, a gilt is the UK equivalent of a US Treasury. You can buy them, like Doctor_Who explained he has, and like I (in TN25) and many others have too. Your understanding is correct that you pay very little tax if you buy a low coupon gilt, since the capital gain is tax free.