Martin Lewis has highlighted a money-making tool that could deliver the equivalent of a 9 per cent return in a savings account. Speaking on his BBC podcast, the MoneySavingExpert founder discussed gilts, which he said could yield around '8-9 per cent', describing them as 'complicated' but potentially 'lucrative'.
The MoneySavingExpert website currently lists the best savings accounts offering a little over 5 per cent, making gilts a potentially higher-return alternative.
What are gilts?
Hargreaves Lansdown explains that a gilt is a 'UK Government bond. When you buy one at issue, you're lending money to the UK Government in return for regular interest. They then give the amount you lent to them back when the bond matures'.
By buying a gilt, rather than leaving money in an account, you are lending it to the Government. This is seen as a safe investment, as the UK Government has never yet defaulted on gilt repayments or coupon payments.
How they work
The UK Government uses gilts to raise money, alongside taxation. Gilts, also known as UK Government bonds, effectively represent the Government selling debt. A customer puts money in, giving it to the Government, and in return the Government pays a set amount of interest - known as the coupon or coupon rate, depending on the length of the bond - before returning the original amount when it matures.
Most gilts have a maturity - or par - value of £100, so you can make money if you have paid less for it in the first place. You may even make a profit if you have bought the gilt at a discounted rate.
Tax efficiency
Mr Lewis explained that gilts can be tax efficient and could yield more money than using a simple savings account. He said: "I've got one minute to try and explain to you what gilts are and why they're useful.
"Now, this is the type of thing that investment advisers will talk to their clients about instead of savings, but most people miss out on. And the reason they talk about it instead of saving rather than investment is the risk profile is similar.
"If you think about it, when you save, you're putting money in a bank or building society, but if that institution went bust, it is the UK government who would pay you back. Well, a gilt is a loan to the UK government, so it's the same people ultimately who's underwriting you getting your money back here.
"Here is how it works: you're giving them a loan, but you're actually just buying - you're buying a gilt. A gilt will pay you back £100 when it matures, so think about a short-dated gilt, let's say it matures in two years' time. You might buy it for £93 knowing it'll pay £100. You'll get a little bit of interest too.
"While the interest is taxable, the gain—you buy at 93, you sell at 100—is capital gains tax-free. So there's a lot of tax advantage here. It can actually give you the equivalent returns of 8 or 9% in a savings account after tax.
"It's complicated. I've got a specialist on the podcast to talk to you about it. Do have a listen, it could be lucrative."
The coupon payments are treated like savings. Currently, assuming your taxable income is more than the £17,570 personal allowance, your first £1000 of savings is tax-free if you are a basic-rate taxpayer, or £500 if you are a higher-rate taxpayer. The personal savings allowance is £0 if you are an additional rate taxpayer.
What makes gilts special is that any gain you make is not subject to capital gains tax (CGT). It will not count towards your CGT allowance, regardless of whether you sell it for a profit or wait for it to mature. You also don't pay any stamp duty or stamp duty reserve tax when you buy a gilt. If you sell at a capital loss this can't be used to offset other gains.
