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Shoppers poured cash into gilts within the first half of January after a sell-off in UK debt markets pushed up yields and lured in retail buyers hoping to make tax-free positive factors.
UK authorities borrowing prices have risen in latest months as a world bond sell-off coincided with issues that the UK is likely to be coming into a interval of stagflation, during which persistently excessive costs stop the Financial institution of England from reducing rates of interest to spice up lacklustre progress.
Retail funding platforms AJ Bell and Hargreaves Lansdown noticed a surge in gilt-buying within the first two weeks of this 12 months, because the UK’s 10-year bond yields rose from 3.75 per cent in mid-September to a 16-year excessive of 4.93 per cent final week.
However gilts rallied this week after UK inflation data opened the door to quicker BoE charge cuts, a transfer strengthened by US inflation data, taking the yield again to 4.73 per cent by Thursday afternoon. Yields transfer inversely to costs.
Gilts which might be held immediately are exempt from capital positive factors tax (CGT). This implies retail buyers who buy gilts buying and selling at a reduction to the £100 face worth can earn tax-free returns, both by redeeming the £100 at maturity, or by promoting above the value they purchased at. The common curiosity funds paid to bondholders, often known as coupons, are nonetheless taxed as revenue.
AJ Bell stated gilts have been its hottest funding product to this point this 12 months, however famous that “these dealing in gilts are likely to characterize a comparatively low variety of our clients, sometimes transacting in bigger sums. Your common investor [is] extra more likely to be placing a a lot decrease quantity right into a multi-asset fund reasonably than shopping for gilts immediately.”
Within the first two weeks of 2025, Hargreaves Lansdown recorded 6,100 gilt purchases by its shoppers, the best fortnightly quantity since October. Hargreaves shoppers have put £225mn into gilts to this point this 12 months, an increase of 123 per cent on the primary two weeks of 2024.
“The latest spike in yields, with the 10-year gilt yield approaching 5 per cent, has made gilts front-page information once more and showcased the enticing returns out there,” stated Sam Benstead, mounted revenue lead at funding platform Interactive Investor.
Interactive Investor stated it had seen a 59 per cent rise in gilt gross sales within the first two weeks of January 2025, in contrast with the identical interval a 12 months in the past. However it stated “the rise in gilt shopping for has been regular over the course of the final 12 months — not a whole soar in January alone”.
Savers have piled into low-coupon gilts to reap the benefits of CGT exemptions, stated Dan Coatsworth, funding analyst at AJ Bell.
Low-coupon gilts ship much less of their returns as taxable coupon funds — as an alternative, the majority of returns come within the type of capital progress, which is exempt from tax. The bonds have been “common amongst individuals who wish to purchase gilts at a reduction and promote them when the value will increase”, Coatsworth stated.
These shopping for low-coupon gilts have been more likely to be “higher-income individuals who may need used up their [tax-free] Isa allowance” of £20,000, he added. “Shopping for gilts in a dealing account is enticing to many individuals on this scenario as a result of it’s one approach to shield any positive factors from the taxman . . . You may promote everytime you need versus holding gilts in a pension the place you have got age-related restrictions on withdrawals.”
Hal Prepare dinner, senior funding analyst at Hargreaves Lansdown, stated the tax benefits of low-coupon gilts shouldn’t essentially discourage retail buyers from shopping for increased coupon merchandise. “They’ve related total yields to low-coupon [bonds] with an identical maturity date, however increased coupon gilts have extra of the return within the type of revenue reasonably than a capital acquire. For some buyers this can be extra acceptable, relying on their particular person circumstances and tax place, in addition to whether or not they’re shopping for the gilt in a tax-wrapper or an unwrapped account.”
Some long-dated gilts have additionally proved common. TG61, a bond with a coupon charge of 0.5 per cent that matures in 2061, topped Hargreaves Lansdown’s record of most-bought gilts and ranked second on Interactive Investor’s record.
TG61 is extremely delicate to rates of interest due to its lengthy maturity date, and its worth has fallen sharply as gilt yields have risen.
Benstead stated that its “look within the most-bought record reveals that some buyers are taking a wager that rates of interest will fall greater than the market expects, which may trigger a giant rally within the worth of this gilt.”
Traders can acquire publicity to gilts by shopping for alternate traded funds or funds that put money into gilts, however to learn from the CGT exemption they have to buy gilts immediately — both at public sale or on the secondary market. The best approach to entry them immediately is to purchase them on the London Inventory Trade, which “is comparatively simple by [investing] platforms and banks,” stated Prepare dinner, of Hargreaves Lansdown.
Extra reporting by Ian Smith
