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Consumers poured money into gilts in the first half of January after a sell-off in UK debt markets boosted yields and attracted retail investors hoping to make tax-free profits.
British government borrowing costs have risen in recent months as a global bond sell-off coincided with concerns that the UK could enter a stagflationin which persistently high prices prevent the Bank of England from cutting interest rates to stimulate weak growth.
Retail investment platforms AJ Bell and Hargreaves Lansdown saw a surge in bullion purchases in the first two weeks of the year, as UK 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 the gilts recovered this week after that UK inflation data opened the door to faster rate cuts by the BoE, which strengthened US inflation databringing the yield back to 4.73 percent by Thursday afternoon. Yields move inversely with prices.
Directly held gilts are exempt from capital gains tax (CGT). This means that retail investors who buy gilts trading at a discount to the face value of £100 can earn tax-free returns, either by redeeming the £100 at maturity or by selling above the price at which they bought. However, the regular interest payments paid to bondholders, known as coupons, are taxed as income.
AJ Bell said gilts have been his most popular investment product so far this year, but noted that “those dealing in gilts tend to represent a relatively small number of our customers, typically transacting in larger amounts. Your average investor [is] they are more likely to put a much smaller amount into a multi-asset fund rather than buying gilts outright.”
In the first two weeks of 2025, Hargreaves Lansdown recorded 6,100 purchases of gilt products by its clients, the highest fortnightly figure since October. Hargreaves clients have invested £225m in gilts so far this year, up 123 per cent on the first two weeks of 2024.
“The recent surge in yields, with 10-year gold yields approaching 5 per cent, has brought gilts back to the headlines and demonstrated the attractive returns available,” said Sam Benstead, head of fixed income at investment platform Interactive Investor.
Interactive Investor said it saw a 59 percent increase in gold sales in the first two weeks of January 2025 compared to the same period a year ago. However, it is stated that “the increase in the purchase of nazlata has been stable over the past 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 a smaller portion of their returns as taxable coupon payments — instead, most returns come in the form of capital growth, which is tax-exempt. The bonds have been “popular with people looking to buy gilts at a discount and sell them when the price goes up,” Coatsworth said.
Those buying low-coupon gilts were probably “higher-income people who may have spent their [tax-free] Isa top-up” of £20,000, he added. “Purchasing gilts in a trading account is attractive to many people in this situation as it is one way of protecting any profits from the IRS. . . You can sell whenever you want, unlike keeping gilts in retirement where you have age limits to raise.”
Hal Cook, senior investment analyst at Hargreaves Lansdown, said the tax advantages of low-coupon gilts should not necessarily discourage retail investors from buying higher-coupon products. “They have similar total yields to low coupons [bonds] with a similar maturity date, but higher coupon gilts have a higher return in the form of income rather than capital gains. For some investors this may be more suitable, depending on their personal circumstances and tax position, as well as whether they are buying gilt in a tax-wrapped or unwrapped account.”
Some long-term gilts have also proved popular. TG61, a 0.5 percent coupon bond maturing in 2061, topped Hargreaves Lansdown’s list of most-bought gilts and second on Interactive Investor’s list.
TG61 is highly sensitive to interest rates due to its long maturity, and its price has fallen sharply as gilt yields have risen.
Benstead said its “appearance on the most-bought list shows that some investors are betting that interest rates will fall more than the market expects, which could cause a big increase 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 buy the gilts directly — 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 simple through [investing] platforms and banks,” said Hargreaves Lansdown’s Cook.
Additional reporting by Ian Smith
