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Consumers poured money into gilts in the first half of January after a sell-off in UK debt markets pushed up yields and lured in retail investors hoping to make tax-free gains.
UK government borrowing costs have risen in recent months as a global bond sell-off coincided with concerns that the UK might be entering a period of stagflation, in which persistently high prices prevent the Bank of England from cutting interest rates to boost lacklustre growth.
Retail investment platforms AJ Bell and Hargreaves Lansdown saw a surge in gilt-buying in the first two weeks of this year, as the UK’s 10-year bond yields rose from 3.75 per cent in mid-September to a 16-year high of 4.93 per cent last week.
But gilts rallied strongly this week after UK inflation data opened the door to faster BoE rate cuts, a move strengthened by US inflation data, taking the yield back to 4.67 per cent by Thursday afternoon. Yields move inversely to prices.
Gilts that are held directly are exempt from capital gains tax (CGT). This means retail investors who purchase gilts trading at a discount to the £100 face value can earn tax-free returns, either by redeeming the £100 at maturity, or by selling above the price they bought at. The regular interest payments paid to bondholders, known as coupons, are however taxed as income.
AJ Bell said gilts were its most popular investment product so far this year, but noted that “those dealing in gilts tend to represent a relatively low number of our customers, typically transacting in larger sums. Your average investor [is] more likely to be putting a much lower amount into a multi-asset fund rather than buying gilts directly.”
In the first two weeks of 2025, Hargreaves Lansdown recorded 6,100 gilt purchases by its clients, the highest fortnightly number since October. Hargreaves clients have put £225mn into gilts so far this year, a rise of 123 per cent on the first two weeks of 2024.
“The recent spike in yields, with the 10-year gilt yield approaching 5 per cent, has made gilts front-page news again and showcased the attractive returns available,” said Sam Benstead, fixed income lead at investment platform Interactive Investor.
Interactive Investor said it had seen a 59 per cent rise in gilt sales in the first two weeks of January 2025, compared with the same period a year ago. But it said “the increase in gilt buying has been steady over the course of the last year — not a complete jump in January alone”.
Savers have piled into low-coupon gilts to take advantage of CGT exemptions, said Dan Coatsworth, investment analyst at AJ Bell.
Low-coupon gilts deliver less of their returns as taxable coupon payments — instead, the bulk of returns come in the form of capital growth, which is exempt from tax. The bonds have been “popular among people who want to buy gilts at a discount and sell them when the price increases”, Coatsworth said.
Those buying low-coupon gilts were likely to be “higher-income people who might have used up their [tax-free] Isa allowance” of £20,000, he added. “Buying gilts in a dealing account is attractive to many people in this situation because it is one way to protect any gains from the taxman . . . You can sell whenever you want as opposed to holding gilts in a pension where you have age-related restrictions on withdrawals.”
Hal Cook, senior investment analyst at Hargreaves Lansdown, said the tax advantages of low-coupon gilts shouldn’t necessarily discourage retail investors from buying higher coupon products. “They have similar overall yields to low-coupon [bonds] with a similar maturity date, but higher coupon gilts have more of the return in the form of income rather than a capital gain. For some investors this may be more appropriate, depending on their individual circumstances and tax position, as well as whether they are buying the gilt in a tax-wrapper or an unwrapped account.”
Some long-dated gilts have also proved popular. TG61, a bond with a coupon rate of 0.5 per cent that matures in 2061, topped Hargreaves Lansdown’s list of most-bought gilts and ranked second on Interactive Investor’s list.
TG61 is highly sensitive to interest rates because of its long maturity date, and its price has fallen sharply as gilt yields have risen.
Benstead said that its “appearance in the most-bought list shows that some investors are taking a bet that interest rates will fall more than the market expects, which could cause a big rally in the price of this gilt.”
Investors can gain exposure to gilts by buying exchange traded funds or funds that invest in gilts, but to benefit from the CGT exemption they must purchase gilts directly — either at auction or on the secondary market. The easiest way to access them directly is to buy them on the London Stock Exchange, which “is relatively straightforward through [investing] platforms and banks,” said Cook, of Hargreaves Lansdown.
Additional reporting by Ian Smith