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Customers 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 good points.
UK authorities borrowing prices have risen in current months as a world bond sell-off coincided with considerations that the UK may be getting into a interval of stagflation, through which persistently excessive costs forestall the Financial institution of England from chopping 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 yr, 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 strongly this week after UK inflation information opened the door to sooner BoE price cuts, a transfer strengthened by US inflation information, taking the yield again to 4.67 per cent by Thursday afternoon. Yields transfer inversely to costs.
Gilts which might be held instantly are exempt from capital good points 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 worth they purchased at. The common curiosity funds paid to bondholders, often known as coupons, are nevertheless taxed as earnings.
AJ Bell stated gilts had been its hottest funding product thus far this yr, however famous that “these dealing in gilts are inclined to characterize a comparatively low variety of our prospects, 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 slightly than shopping for gilts instantly.”
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 thus far this yr, an increase of 123 per cent on the primary two weeks of 2024.
“The current spike in yields, with the 10-year gilt yield approaching 5 per cent, has made gilts front-page information once more and showcased the engaging returns obtainable,” stated Sam Benstead, mounted earnings 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 yr in the past. However it stated “the rise in gilt shopping for has been regular over the course of the final yr — not an entire bounce in January alone”.
Savers have piled into low-coupon gilts to benefit from 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 “in style amongst individuals who need to purchase gilts at a reduction and promote them when the worth will increase”, Coatsworth stated.
These shopping for low-coupon gilts had 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 engaging to many individuals on this state of affairs as a result of it’s one approach to defend any good points from the taxman . . . You may promote everytime you need versus holding gilts in a pension the place you’ve got age-related restrictions on withdrawals.”
Hal Cook dinner, senior funding analyst at Hargreaves Lansdown, stated the tax benefits of low-coupon gilts shouldn’t essentially discourage retail buyers from shopping for larger coupon merchandise. “They’ve comparable total yields to low-coupon [bonds] with an identical maturity date, however larger coupon gilts have extra of the return within the type of earnings slightly 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 in style. TG61, a bond with a coupon price of 0.5 per cent that matures in 2061, topped Hargreaves Lansdown’s listing of most-bought gilts and ranked second on Interactive Investor’s listing.
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 listing exhibits 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.”
Buyers can acquire publicity to gilts by shopping for alternate traded funds or funds that spend money on gilts, however to learn from the CGT exemption they need to buy gilts instantly — both at public sale or on the secondary market. The best approach to entry them instantly is to purchase them on the London Inventory Change, which “is comparatively simple by way of [investing] platforms and banks,” stated Cook dinner, of Hargreaves Lansdown.
Further reporting by Ian Smith