Surge in advisers buying UK government bonds for clients

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Monetary advisers have been snapping up UK authorities bonds on behalf of their purchasers to fulfill surging demand, as buyers search engaging earnings streams and tax-free positive factors.

UK authorities borrowing prices have jumped prior to now few months to a 16-year excessive in January, partially due to issues that the UK is dealing with weaker financial development and better costs.

However bond yields, which transfer inversely to costs, eased final week because the Financial institution of England cut its base interest rate by 1 / 4 level to 4.5 per cent.

Based on retail funding website AJ Bell, adviser purchases of gilts via its platform rose by a 3rd in January in contrast with the earlier month. Final yr, the variety of adviser gilt purchases via AJ Bell’s dealing service jumped by 436 per cent.

Gilts held immediately in buying and selling accounts are exempt from capital positive factors tax, which means bonds buying and selling beneath their face worth can ship tax-free returns for buyers who redeem at maturity or promote above the acquisition worth. Common curiosity funds, or coupons, are taxed as earnings until held in a tax-free wrapper.

“Advisers are more and more turning to gilts as a consequence of excessive yields by historic requirements, but in addition to guard their purchasers from a capital positive factors tax invoice,” mentioned Mark Rendle, a director at AJ Bell.

“Gilts are exempt from CGT and the place a shopper has a big sum to pay, reminiscent of with the sale of a enterprise, it may be environment friendly to make use of short-dated gilts to part into the market or to carry a part of that sum again to pay a tax invoice with out taking any capital threat.”

Jonny Black, chief business and technique officer at Abrdn Adviser, mentioned the corporate skilled an 84 per cent enhance final yr of advisers shopping for bonds, the vast majority of which had been gilts.

Evelyn Companions, one of many UK’s largest wealth managers, mentioned its funding managers have a “choice for gilts over US Treasuries not too long ago, given the attractiveness of nominal yields which spiked a month in the past however have eased again a bit since.”

Jason Hollands, a managing director at Evelyn, mentioned gilts issued through the interval of ultra-low rates of interest pay “very low ranges of fastened curiosity” however can be found at costs beneath the extent they are going to be redeemed at on maturity.

In consequence, the lion’s share of returns will come from capital positive factors fairly than curiosity. He mentioned that that is “very engaging” to the next or additional-rate taxpayer in comparison with a money financial savings account.

Hollands mentioned that one such gilt, as a consequence of mature in October 2026 at £100, pays a low fastened curiosity coupon of 0.375 per cent, however is that can be purchased at £94.27.

“So an investor shopping for in the present day is aware of they are going to make a capital achieve in the event that they maintain to maturity when it redeems at £100 in October subsequent yr,” he added.

St James’s Place advisers ploughed £17mn of their purchasers’ cash via its discretionary fund supervisor into gilts final month — a “important enhance” on the earlier month, in response to SJP. The bulk was invested in two-year gilts, and a few constituted reinvestment after the January 2025 gilt matured. SJP mentioned it had began “to see an elevated urge for food” for five-year gilts within the first week of February.