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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 positive factors.
UK authorities borrowing prices have risen in latest months as a worldwide bond sell-off coincided with issues that the UK may be coming into a interval of stagflation, during which persistently excessive costs stop the Financial institution of England from slicing rates of interest to spice up lacklustre development.
Retail funding platforms AJ Bell and Hargreaves Lansdown noticed a surge in gilt shopping for 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 quicker BoE fee cuts, a transfer strengthened by US inflation information, taking the yield again to 4.68 per cent by Thursday’s shut. Yields transfer inversely to costs.
Gilts held instantly are exempt from capital positive factors tax (CGT). This implies retail buyers who buy authorities bonds which can be buying and selling at a reduction to a £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 called coupons, are nevertheless taxed as earnings.
AJ Bell mentioned gilts had been its hottest funding product up to now this yr, 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 prone to be placing a a lot decrease quantity right into a multi-asset fund reasonably than shopping for gilts instantly.”
Within the first two weeks of 2025, Hargreaves Lansdown recorded 6,100 gilt purchases by its purchasers, the very best fortnightly quantity since October. Hargreaves purchasers have put £225mn into gilts up to now this yr, 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 engaging returns obtainable,” mentioned Sam Benstead, fastened earnings lead at funding platform Interactive Investor.
Interactive Investor mentioned 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. But it surely mentioned “the rise in gilt shopping for has been regular over the course of the final yr — not a whole soar in January alone”.
Savers have piled into low-coupon gilts to reap the benefits of CGT exemptions, mentioned Dan Coatsworth, funding analyst at AJ Bell.
Low-coupon gilts ship much less of their returns as taxable coupon funds — as a substitute, the majority of returns come within the type of capital development, which is exempt from tax. The bonds have been “common amongst individuals who need to purchase gilts at a reduction and promote them when the value will increase”, Coatsworth mentioned.
These shopping for low-coupon gilts have been prone to be “higher-income individuals who might 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 scenario as a result of it’s one solution to shield any positive factors 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 Prepare dinner, senior funding analyst at Hargreaves Lansdown, mentioned the tax benefits of low-coupon gilts mustn’t essentially discourage retail buyers from shopping for higher-coupon merchandise. “They’ve related general yields to low-coupon [bonds] with an analogous maturity date, however increased coupon gilts have extra of the return within the type of earnings reasonably than a capital achieve. 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 fee of 0.5 per cent that matures in 2061, topped Hargreaves Lansdown’s checklist of most-bought gilts and ranked second on Interactive Investor’s checklist.
TG61 is very delicate to rates of interest due to its lengthy maturity date, and its worth has fallen sharply as gilt yields have risen.
Benstead mentioned that its “look within the most-bought checklist exhibits that some buyers are taking a guess that rates of interest will fall greater than the market expects, which might trigger a giant rally within the worth of this gilt.”
Buyers can achieve publicity to gilts by shopping for change traded funds or funds that put money into gilts, however to profit from the CGT exemption they have to buy gilts instantly — both at public sale or on the secondary market. The best solution to entry them instantly is to purchase them on the London Inventory Alternate, which “is comparatively easy by way of [investing] platforms and banks”, mentioned Prepare dinner, of Hargreaves Lansdown.
Further reporting by Ian Smith
