Savers are increasingly stashing their cash in government bonds to avoid capital gains tax, according to wealth managers.
Financial advisers said they are raising their clients’ allocations of gilts to take advantage of attractive returns and tax-free gains.
Concerns about weaker economic growth and rising prices are also fuelling the surge in purchases of gilts, which are considered a “reliable choice” for steady guaranteed returns.
Regular interest payments from gilts, known as coupons, are taxed as income unless held in a tax-free wrapper. However, gilts are exempt from capital gains tax, meaning investors can make tax-free returns if they redeem at maturity or sell for less than the purchase price.
Investment firm AJ Bell reported a 436pc rise in the number of adviser gilt purchases on its platform last year. Gilt purchases in January were a third higher than the previous month.
Jason Hollands, of Evelyn Partners, said his firm had also increased its allocation of client funds in government bonds in recent months, adding: “The economic outlook hasn’t been great since the Budget. Gilt yields have spiked as markets concluded that the tax-grabbing package Rachel Reeves announced has muddied the waters with respect to growth.”
The freeze of income tax thresholds since 2021 has meant rising numbers of taxpayers being dragged into higher bands – and paying a larger share of gilt coupons in tax as a result.
Income tax bands are meant to rise with inflation but will remain frozen until 2027-28. The additional rate threshold was lowered from £150,000 to £125,140 in 2023-24 under the previous Government. However, the owner of a gilt can also make money if they redeem at maturity or sell above the purchase price.
Gilts issued during the period of ultra-low interest rates pay “very low levels of fixed interest” but are now available at prices below the level they will be redeemed at on maturity, Mr Hollands said. This means the bulk of returns from many gilts are coming from tax-free capital gains rather than taxable interest.
He added: “The difference between price and the return on maturity is extremely predictable, which is attractive.
“You can lock in a meaningful short-term gain over the next few years. You’d need an incredibly high level of interest on savings to match that post-tax.”
The gradual loss of the tax-free personal savings allowance means gilts are a particularly attractive option for higher and additional-rate taxpayers compared to a cash savings account.
The personal savings allowance means basic rate taxpayers can receive up to £1,000 of interest tax-free per year. But this falls to £500 for higher-rate taxpayers, and those paying the additional 45pc rate get no allowance at all.
Mark Rendle, of AJ Bell, said advisers were increasingly turning to gilts due to historically high yields, but also to protect their clients from a capital gains tax bill.
He added: “Gilts are exempt from capital gains tax and where a client has a large sum to pay, such as with the sale of a business, it can be efficient to use short-dated gilts to phase into the market or to hold part of that sum back to pay a tax bill without taking any capital risk.
“Buying a UK gilt issued in 2016 that matures on 22 July 2026 and has a 1.5pc coupon would result in a return over 5pc and minimises the income tax due to the lower coupon, with the capital return on the discount to the maturity value returned free of capital gains tax.”
Ian Cook, of Quilter Cheviot, said the recent easing of interest rates by the Bank of England and ongoing concerns about weaker economic growth have further enhanced the appeal of gilts.
He added: “Short-dated, low coupon gilts are currently standing out as an attractive investment option, driven by a combination of guaranteed capital growth to maturity date, tax efficiency, and the stability they offer in uncertain economic conditions.
“Their government backing provides a level of security that’s difficult to match, making them a reliable choice for clients who prioritise capital preservation alongside steady returns.”
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