What follows aims only to be a general introduction to the main taxation rules applying to gilts at the time of writing (November 2016) and the DMO accepts no liability for its content. The exact treatment applied in any particular case depends on the particular circumstances of each taxpayer. If in doubt, investors should seek professional advice.
Summary of the main features of the taxation rules for gilts
Conventional and index-linked gilts
Interest on all registered gilts is payable gross, without deduction of tax. Holders of gilts on the Register maintained by CIS may opt to have tax deducted at source by applying to CIS.
Interest received is taxable and must be declared on tax returns. This includes the interest uplift on index-linked gilts. But the uplift in principal as a result of index-linking is not interest, and is not taxable.
A UK individual investor selling or otherwise transferring gilts may be liable to income tax on interest accrued up to the transfer, under the accrued income scheme. Similarly, the scheme relieves an investor from tax on interest which accrued before that investor’s acquisition of the gilt, or after the investor’s disposal of it.
Investors whose holdings of all securities within the accrued income scheme have not exceeded £5,000 nominal value during the relevant year of assessment, or the previous one, are outside these rules.
Further information on the accrued income scheme can be found on the website of H M Revenue and Customs (HMRC). A brief outline can be found at: https://www.gov.uk/government/publications/accrued-income-scheme-hs343-self-assessment-helpsheet.
A more detailed account can be found in HMRC’s Savings and Investment Manual.
Apart from this, profits or losses made on the disposal of gilts (including on redemption) by individual investors are not taxable and do not have to be included on the investor’s tax return, either as income or capital gains.
When the DMO makes conversion offers any capital gain arising from these conversions is not subject to capital gains tax for private investors. However, in some circumstances an accrued income charge may arise. Investors considering a conversion offer who are unsure of their tax position should seek professional advice, or consult the HMRC office dealing with their tax affairs.
Individual investors may hold gilts in stocks and shares ISAs. Individual investors who are resident and ordinarily resident in the UK can subscribe up to the relevant ISA limit for the financial year in question. Income and capital gains from investments held in ISAs are exempt from income tax and capital gains tax and should not be shown on tax returns. Should an individual investor wish to hold gilts in an ISA, the gilts will need to be purchased through an authorised ISA manager.
More details about ISAs and a list of authorised ISA managers are available on the HMRC website.
All gains and losses on gilt strips held by individuals are taxed as income on an annual basis. At the end of the tax year, individuals are deemed for tax to have disposed of and reacquired their holdings of gilt strips at their then current value; any gain (or loss) arising during the year on the holding is taxed (or relieved) as income.
Gilt strips can be held by individuals within ISAs on the same basis as conventional and index-linked gilts.
Under the loan relationship legislation, UK corporate investors are liable to tax at the corporation tax rate on the total return from their holdings of gilts and gilt strips according to the appropriate authorised accounting method. In most cases, taxable profits or losses will follow the credits or debits shown in the company’s accounts. (There are special rules for companies carrying on a life assurance business).
Indexation relief on index-linked gilts
For corporates the RPI inflation uplift on the principal for index-linked gilts is excluded from tax, unless the company is a financial trader. The company must, however, use fair value accounting to determine the amounts taxable on the index-linked gilt. Profits and losses arising for reasons other than RPI movements are taxable.
Gilts held on FOTRA (Free of Tax to Residents Abroad) terms, and the interest on them, are generally exempt from tax if they are held by persons who are not ordinarily resident in the UK. The precise terms depend on the prospectus under which the gilts were issued; but under the most recent version (post-1996), income on FOTRA gilts is exempt from tax if the holder is non-resident, unless the income is received as part of a trade conducted in the UK. In April 1998, all existing non-FOTRA gilts were made FOTRA gilts on post-1996 terms.
As explained in the issued by HM Treasury on 29 May 1985, in the interest of the orderly conduct of fiscal policy, neither Her Majesty’s Government nor its servants or agents undertake to disclose tax changes decided on but not yet announced, even where they may specifically affect the terms on which, or the conditions under which, Stock is issued or sold by or on behalf of the Government. No responsibility can therefore be accepted for any omission to make such disclosure and any such omission shall neither render any transition liable to be set aside nor give rise to any claim for compensation.