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How to profit from the debt crisis: buy gilts and earn 10pc risk-free

Richard Evans

Chaos in the bonds markets has produced an unexpected opportunity for savvy investors.

DIY investors cashing in on the crisis can pick up a guaranteed tax-free capital return of 10pc in just two years by buying British government bonds.

These bonds, also known as “gilts”, are part of a select group of investments that have never failed to pay back what was promised. Just a handful of countries can make that claim of their bonds.

So much has happened in the markets in recent days that it is hard to keep track. But while the fall in the pound has attracted attention, arguably the bigger news has been the fall in bond prices – and in particular in gilt prices.

Since the financial crisis a decade ago, gilts had yielded next to nothing. No private investor who wanted to make a decent return would have considered them. But that has all changed. As a result of the fall in gilt prices, savers now have the opportunity to make a quick, 100pc safe profit.

One example is the gilt that is due to mature on Jan 31 2025 – in other words, in little more than two years’ time. When the markets closed on Thursday night it was selling for £90.84 and it will, of course, be repaid at its “par” or face value of £100. That is a capital gain of just over 10pc.

You’ll even get some interest on top – not a lot, it is true, as this bond was issued with a “coupon” (as interest on bonds is called) of 0.25pc a year. This reflects exactly those minimal returns offered on gilts issued over the past 10 or so years.

It’s true that interest rates on savings accounts have also been rising so quickly that 10pc over two-and-a-bit years is no longer an incredible deal. But a quirk of the way gilts are taxed may make them more attractive for some savers. There is no tax to pay on capital gains on gilts – and almost all of your return on this particular gilt would be capital as opposed to interest. On a savings account, your entire return would be taxed. So if you have used up your personal savings and Isa allowances, buying gilts could be the way to keep your tax bills down.

Money

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2022-10-01T07:00:00.0000000Z

2022-10-01T07:00:00.0000000Z

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Daily Telegraph