Gilts, or gilt-edged securities, are bonds issued by the UK government to raise money. They represent a loan from you to the government. Since the government is unlikely to default on a loan, gilts are considered to be lower risk than corporate bonds.
Gilts generate an income for you through interest on your capital.
The government promises to pay a fixed rate of interest (‘coupon’) for a fixed period at regular intervals until maturity, upon which it will repay the original loan or capital back to you, the investors.
These are often referred to as plain 'vanilla' bonds, as both the coupon and redemption date are fixed at the outset.
The redemption date is often fixed at the outset, however the coupon is linked to an underlying index such as the Retail Price Index (RPI) or Consumer Price Index (CPI).
Gilts are also categorised according to their term, or maturity date:
Short-maturity gilt = 5 years
Medium-maturity gilt = 5-15 years
Long-maturity gilt = 15 years or more
The redemption date for gilts varies. Dated gilts have a stated (firm) redemption date, whereas undated gilts do not. With double-dated gilts, the government chooses the exact timing of redemption at a point between two specified dates.
If you want to sell a bond before its redemption date, you may get back less than you originally invested.
Interest on gilts is paid gross, but is liable for Income Tax. This makes gilts particularly attractive to non-tax payers. Any profits from selling gilts are tax-free and don't have to be included on tax returns.
You can invest in bonds in a couple of ways: