Stay informed with free updates

Just sign up to Investments myFT Digest — delivered directly to your inbox.

Consumers poured money into gilts in the first half of January after a sell-off in UK debt markets pushed up yields and attracted retail investors hoping to make a tax break.

UK government borrowing costs have risen in recent months as a global bond sell-off coincided with concerns that the UK could be entering a period of stagflationwhere persistently high prices prevented the Bank of England from cutting interest rates to boost lackluster growth.

Retail investment platforms AJ Bell and Hargreaves Lansdown saw a surge in gilt-buying in the first two weeks of this year, as 10-year UK bond yields rose from 3.75 percent in mid- mid-September to a 16-year high of 4.93 per cent last week.

But gilts rallied this week afterwards UK inflation data opened the door to faster rate cuts by the BoE, a move reinforced by US inflation datatook the yield back to 4.73 percent on Thursday afternoon. Yields move back to prices.

Gilts held directly are exempt from capital gains tax (CGT). This means that retail investors who buy gilts trading at a discount to the £100 face value can get tax-free returns, by redeeming the £100 at maturity, or by selling above the price they bought it for. Regular interest payments paid to bondholders, known as coupons, are nevertheless taxed as income.

AJ Bell said gilts had been the 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 -transactions of larger amounts Your average investor (is) more likely to put a lower amount into a multi-asset fund than buying gilts outright.

In the first two weeks of 2025, Hargreaves Lansdown recorded 6,100 gilts bought by its clients, the highest fortnightly volume since October. Hargreaves clients have placed £225mn in gilts so far this year, an increase of 123 per cent in the first two weeks of 2024.

“The recent spike in yields, with 10-year gilt yields approaching 5 percent, has made gilts front-page news again and shows attractive returns are available,” said Sam Benstead, fixed income lead. on the investment platform Interactive Investor.

Interactive Investor said it saw a 59 percent increase in gilt sales in the first two weeks of January 2025, compared to the same period last year. But it says “the increase in gilt purchases has been steady over the past year – not a complete jump in January alone”.

Savers are flocking to 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, most returns come in the form of capital growth, which is tax-free. The bonds have become “popular with people who want to buy gilts at a discount and sell them when the price rises”, Coatsworth said.

Those buying low-coupon gilts are likely to be “higher-income people who might have used their (tax-free) Isa allowance” of £20,000, he added. “Purchasing gilts in a dealing account appeals to many people in this situation because it is a way to protect any profit from the taxpayer.” . . 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 should not discourage retail investors from buying higher coupon products. “They have the same total yield as low coupon (bonds) with the same maturity date, but higher coupon gilts have more return in the form of income than a capital gain. For some investors it may be more appropriate, depending on their individual circumstances and tax position, as well as if they buy the gilt in a tax-wrapper or in an unwrapped account.

Some long-lived gilts have also proved popular. TG61, a bond with a coupon rate of 0.5 percent maturing in 2061, topped Hargreaves Lansdown’s list of the most bought gilts and ranked second on Interactive Investor’s list.

TG61 is very sensitive to interest rates due to its long maturity date, and its price has fallen sharply as gilt yields have risen.

Benstead said that “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 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 buy gilts directly — either at auction or in the secondary market. The easiest​​​​ way to access it directly is to buy it on the London Stock Exchange, which is “relatively straightforward through (investment) platforms and banks,” said Cook, of Hargreaves Lansdown.

Additional reporting by Ian Smith