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UK Government index-linked gilts
Index-linked gilts account for 30% (March 2008) of all UK government debt. They were first issued in 1981. There are similar instruments in USA, Australia and Canada.
The index ratio (current index/base index) is used to measure the growth in the RPI since the particular gilt was first issued (base index). The index ratio is published by the DMO and provides a daily reference RPI and index ratio series for all 3-month index-linked gilts.
Inflation is measured by the percentage change in the index compared to the same month one year earlier.
Government’s expression of inflation (the headline rate) is now based on the Consumer Prices Index (CPI) which does not include MIPS (Mortgage Interest Payments). Before this they used the RPIX (RPI without MIPS) The RPI is used for pensions, state benefits and index-linked gilts.
List of Index Linked Gilts
A full list of index-linked gilts can be found at http://www.dmo.gov.uk/chooseFormat.aspx?rptCode=D3B.2&page=Gilts/Daily_Prices.
How index-linked gilts differ to conventional gilts
They differ to conventional gilts in that both the semi-annual coupon payments and the principal are adjusted in line with the General Index of Retail Prices (RPI). That is they take account of accrued inflation since the gilt was first issued.
If you are calculating cash flows or redemption values then you will use the RPI at your purchase date as your base index.
There are tables, calculations and explanations on the DMO website at http://www.dmo.gov.uk/index.aspx?page=About
Office for National Statistics website for information on RPI etc. http://www.statistics.gov.uk/default.asp
In 2005 the DMO (Debt Management Office) launched an improved design for any new index-linked gilt which use a three month indexation lag (as opposed to eight months lag previously used). Note: there are both types of index-linked gilts currently in existence.
Since 1998 all gilt interest is paid gross, but is taxable (including RPI uplift on interest) All profits on gilts are not taxable either to CGT or Income tax.
Interest + capital appreciation subject to corporation tax With index-linked gilts the RPI uplift on principal is excluded from tax.
All gilts with more than 5 years life remaining can be put into an ISA (Individual Savings Account)
Accrued interest scheme
If the value of gilts in any one year exceed £5000 nominal then accrued interest (on transfer) is taxable (or relievable).
The DMO assume annual interest rate of 3% although the press assume a 5% rate.
Could the government substitute RPI with CPI? They could but they would probably consult with the markets.
Are index-linked gilts a good investment?
If you think that inflation will gradually rise in the medium/longer term or even that we may get hyperinflation- then yes, definitely. If you think we will have deflation or very low inflation then, no.