Does it make any sense for UK private investors to hold gilts directly and outside of a tax wrapper?

Question

According to my understanding of gilts (which is in accordance with the answers here), private investors in UK gilts paying a premium on the redemption price (for example 2% T20s currently report a buy price of £107.65) who can't shelter them in SIPP or ISA wrapper are basically choosing to take an income which is taxed for the cost of a capital loss, which they can't claim due to the CGT-exempt status of gilts.

Basically my question is: is there any way it makes sense to buy and hold these things outside of a SIPP/ISA wrapper? Is there some trick I'm missing which actually makes them more attractive than I think they are?

For example for the 2% T20 mentioned above, someone investing £107,650 should see (I think) 8 more biannual payments of £1000 for a total of £8000 interest, but if those are taxed in a 20% band they only see £6400 of that, and after redemption they've only seen £106,400 back for a total loss of £1250, and with a capital loss which isn't useful for other CGT purposes). This seems a poor deal. (An investor who can take the income in an ISA or similar at least makes a meagre return of £350).

Answer 1

Your analysis appears to be correct. Equally, your conclusion is correct - currently it does not appear to be attractive for a private investor to hold Gilts whose yields are small and whose prices are trading at a premium to the nominal value. This is all because of the current interest rate environment, where interest rates are very low across all maturities.

When it would make sense for private investors to hold Gilts with a small coupon yield is if the interest rate environment changes significantly. Although it is hard to imagine UK rates rising any time soon, "eventually" rates will rise. When this happens, those Gilts which have been issued with small coupon yields will start trading at a discount - i.e., their price will be below the nominal price. This will give private investors the opportunity to buy a market yield and at the same time enjoy a potential capital gain free of Capital Gains Tax.