Interactive Investor

Gilts or UK Treasury Bills – which should you choose?

The UK government offers investors two ways to get a safe income, but they have different features.

23rd April 2024 10:38

by Sam Benstead from interactive investor

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The UK government raises money by issuing bonds: the first type are known as UK Treasury Gilts for longer-term government borrowing and the second are known as UK Treasury Bills (UK T-Bills), for shorter-term government borrowing.

Once the preserve of large investors, interactive investor is breaking down barriers of access to the UK government debt market. 

ii customers have already being invited to participate in selected gilt auctions known as tenders, and now UK T-Bill access is being opened up too.  

While gilts attract most of the media and investor attention, UK T-Bills are also a valuable savings tool which offer something different to the gilt market. 

These are the key differences between T-Bills and gilts.  

No coupons, just one final payment on maturity 

UK T-Bills are “zero coupon” bonds, with all the return for investors coming when the T-Bill matures, rather than via coupon payments. However, a yield figure is shown.    

The investment return comes solely from the difference between the price the government sells to investors at (less than £100) and the redemption price the government pays back (£100). 

In contrast, the total return, or yield to maturity of a gilt, is a mixture of coupon payments and the return of the £100 principal on maturity.  

It therefore can be simpler to calculate returns for T-Bills, with bonds typically maturing in one, three and six months after issue. This makes them similar to fixed-rate savings accounts, but backed by the UK government and with no maximum investment amount. 

Returns taxed as income, not capital gains 

For tax purposes, UK T-Bills are considered “deeply discounted securities” and therefore have different tax rules to gilts.  

This means that any gains from UK Treasury Bills are taxed as income, rather than capital gains. This differs to gilts, where capital gains are tax-free but coupons are taxed as income. There is no tax if held inside an ISA.   

For investors owning T-Bills or gilts outside an ISA, the tax status is important to understand.  

Because a large part of the total yield from low-coupon gilts issued when interest rates were near zero comes from the capital uplift when the bonds mature, they are a useful tool to pay less tax on investments held outside tax-efficient wrappers, such as SIPPs or ISAs. T-Bills do not offer this advantage, as all the returns are taxed as income.  

No secondary market  

Unlike gilts, there is not an active secondary market to buy and sell for UK T-Bills, so investors must be prepared to hold the instrument until the set maturity date.   

Shorter maturities means simpler planning 

As mentioned, UK T-Bills are issued with one, three and six months to maturity, with the return fixed for this period.  

On the other hand, gilts mature over longer periods, such as five or 10 years, meaning that investors accessing gilts at auction may be committing to a longer holding period if they are intending to hold the bonds to maturity.  

Because gilts can be sold on the secondary market, and gilt prices are volatile, investors who sell a gilt before maturity may get less than they paid for it. This may happen if interest rates rise, which is bad news for bond prices.  

Investors are able to buy gilts on the secondary market maturing soon, therefore owning a bond that will mature when they want their cash back. The total return will come from a mixture of capital gains/losses and coupons. 

Is the execution/pricing process different in gilts and UK T-Bills?

UK T-Bills are executed through an auction process, whereby market participants place bids to the Debt Management Office (DMO) based on their target size and yield. The DMO will accept bids and allocate T-Bills to bidders at the lowest bid yields until the target issue size is reached. Each bidder receiving an allocation is filled at the yield of their respective bid.

The results of each auction are published on the DMO website under the Treasury Bill Tender Results. These results include details of the highest, lowest and average yields that were accepted. You can find details of previous issues here.

To achieve a successful allocation of UK T-Bills in the auction process, ii will seek to submit bids that are inside the highest and lowest accepted yields, taking account of the prevailing market conditions at the time.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.

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