Are Index Linked Gilts the New Shares to Buy

Personal allowances, inheritance tax allowances, annual and lifetime allowances for pensions and capital gains tax allowances have now been frozen until tax year 2026-27.

This means that ‘via the back door’ we will all pay an estimated £60 billion more in personal taxes in the coming years.

This means the search goes on for investment opportunities with tax benefits.

ISAs and pensions are the easy options.  Property rental income is now less attractive with all the changes to property income taxation, stamp duty and now capital gains tax allowances frozen.  In addition, stocks and shares already facing increasing taxes on dividends and now CGT allowances have been frozen, the picture looks less attractive.

What about buying shares in “The British Government PLC”.

The government is continually borrowing money every week from investors such as pension and investment funds, banks and directly from individual investors.  These are know as ‘gilts’ – Gilt Edged Securities backed by the British Government.  There are two types of Treasury Gilt stock:

• Fixed Rate Gilts – a fixed rate of interest (coupon) paid every 6 months and then the capital is repaid on maturity date
• Index Linked Gilts – inflation protection linked to RPI with interest (coupon) paid every 6 months and then the capital being inflation protected to maturity date.

Gilts are exempt from chargeable gains section 115 of the Taxation of Chargeable Gains Act 1992  i.e. Gilts or Treasury Stocks are capital gains tax free.

Covid-19 Debt & Inflation

We have suggested many times that the only way governments around the world are going to be able to pay for covid borrowing is to devalue the debt before repaying it i.e. higher inflation.  We have already seen announcements by US Federal Reserve, the Australian Reserve and many more suggesting that they will “no longer control inflation with interest rates for the foreseeable future”.  A clear signpost that inflation is coming and governments and central banks actually need inflation.  USA inflation last week (1^st week June 2021) is already at 5% pa.  5% pa compounded over a 10 year period equates to 63% and at 20 years 165% - i.e. a massive devaluation in fixed rate government debt and massive growth in index linked government debt.

Is it time to think about Index Linked Gilts as the new Stock to buy given their capital gains tax free position and the fact the inflation is starting to build?

How do I buy gilts directly?

There are two ways of buying gilts. You can go direct to the Government's Debt Management Office (DMO) when new stock is issued or you can go to the market via a stockbroker or the Bank of England's brokerage service, which allows stock to be bought and sold – via the Bank Of England website.  You used to be able to buy gilts through any main Post Office but this stopped in 2002.

• More Information from DMO:  https://www.dmo.gov.uk/responsibilities/gilt-market/buying-selling/purchase-sale-service/
• Buy/Sell Gilts Information: https://www.computershare.com/uk/Pages/Gilts.aspx
• Buy/Sell Forms: https://www.computershare.com/uk/gilts/downloadable-forms