Each investor put £129,000 in five 0.125% gilts for tax-free growth.

A leading investment platform reported that some deep-pocketed investors abandoned the stock market and savings accounts in preference of investing large sums in UK government bonds yielding as little as 0.125 percent last month.

Investing Frenzy in Low-Yield UK Bonds

According to AJ Bell, do-it-yourself investors engaged in a gilt purchasing frenzy in September, depositing an average of £129,000 into five short-term UK bonds.

Rising Demand for Tax-Friendly Bonds

Consequently, according to AJ Bell, low-yielding UK bonds comprised five of the ten most popular investments purchased by do-it-yourself investors in September. This is because bonds purchased below par can generate a capital gains tax-free return upon redemption at face value due to a tax-friendly feature.

Each investor put £129,000 in five 0.125% gilts for tax-free growth.

Driving Factors Behind the Gilt Demand

Investment platforms and wealth managers have witnessed investors racing to incorporate short-term UK bonds into their portfolios over the past year, as demand for such bonds has escalated to an all-time high. Additionally, interactive investor, an investment platform, recently reported an increase in demand for this category of investment: fixed income trading, of which UK bonds are a type, increased by a staggering 721% from the same period last year to September.

Strong demand for UK bonds, according to AJ Bell, has been a developing trend throughout the summer. AJ Bell investors purchased the majority of their September purchases of UK bonds maturing between January 2024 and January 2026.

What Drives the Demand for Gilt Bonds?

Demand for recently issued or newly issued UK bonds has likely been stimulated by investors anticipating the peak of the interest rate cycle. However, those purchasing older low-yielding securities are primarily interested in cut-price bonds that offer tax-friendly yields until maturity.

Impact of Inflation and Interest Rates

According to Laith Khalaf, the director of investment analysis at AJ Bell, short-term yields have decreased during the summer as inflation has moderated and the Bank of England has halted interest rate hikes. ‘This has likely influenced the decisions of some investors to lock in yields in the event that they continue to decline.’

Tax Efficiency of Gilts

However, an additional rationale for the substantial demand for UK bonds is that, contingent upon one’s tax liability, certain bonds featuring brief maturities may offer a more favorable assured rate of return in comparison to the most reputable savings accounts.

Tax Advantage of Gilts Over Savings Accounts

This is due to the fact that investors who purchase them at prices below par can acquire £100 in the near future for a substantial discount now, thereby generating a nearly tax-free capital gains profit in the future. In conjunction with the fact that the most popular bonds have low coupons and brief maturities, this indicates that investors are purchasing gilts rather than cash in order to reduce their tax liability, according to Khalaf.

Comparing Taxation: Gilts vs. Savings Accounts

“Since gilts are exempt from capital gains tax (CGT), low-coupon bonds that depend on a substantial return on capital will incur minimal tax liability, consisting solely of income tax on the meagre interest received.”

Tax Efficiency for Savers

This is in contrast to a savings account, the interest on which could potentially accrue tax at a rate of 20%, 40%, or 45%. Therefore, individuals who have exceeded their personal savings allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and £0 for top rate taxpayers) may find gilts to be more tax efficient if the yields are comparable. It is understandable, in light of current cash rates and yields, that certain savers would be tempted to indulge in opulent gold.

Accessing Government Bonds

Although purchasing individual gilts via an investment platform such as Hargreaves Lansdown, AJ Bell, Interactive Investor, or Killik & Co. is typically more difficult than purchasing shares or funds, it is still possible for investors to acquire government bonds via funds.

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