Gilts are bonds which the Government issues to fund its borrowing. They give a fixed income to investors every year and, if they have a redemption date, the return of the nominal capital at the end of the period.
Like shares, gilts can be bought and sold through stockbrokers, high street banks, building societies and financial advisers. During their life, their value fluctuates depending on rises and falls in interest rates and inflation.
They can be suitable for investors who want a fixed income and do not need their money back quickly. They may also suit those who want to gamble that interest rates may fall - gilt prices then rise, leading to a capital gain.
This week's Treasury consultation document proposes that investors holding more than pounds 20,000 of gilts and other bonds should have their profits - both in interest and capital gains - taxed as income.
However, they will be allowed to offset capital losses against tax. Capital gains on gilts are currently tax-free. Only the interest is taxed.
Individuals holding gilts would be taxed on the interest received on a year-by-year basis, with profits and losses made on disposal taken into account when working out total income.
Individuals with less than pounds 20,000 will be exempt. While at least 90 per cent of individual gilt holders will escape the tax drag, corporate holders such as insurance companies will be hit.
The Treasury hopes the tax changes will allow development of new gilt products. A potential investment will be gilt "strips", where the interest coupon is separated from the principle.
Pension funds will be among those able to take advantage of the change, by matching liabilities with assets of a specific duration.
But there will be losers, as the Independent revealed last week. These could include many investors who have poured almost pounds 1bn into a range of guaranteed income bonds (GIBs) sold by insurance companies.
Their guarantees of high income and growth, paid net of tax at the basic rate, were underpinned by gilt options. But the companies' assumption of tax-free gains have been knocked by the Treasury's proposals.
These GIBs will in future be taxable, unless insurers who sold them execute a smart about-turn, ignore their small print and deliver the "guarantees" they gave so freely when marketing their products.
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