Investors piled £129,000 each into five gilts paying as little as 0.125% for a tax-free boost

Some deep-pocketed investors shunned the stock market and savings accounts in favour of ploughing large sums into UK government bonds paying as little as 0.125 per cent last month, a leading investment platform said.

DIY investors went on a gilt-buying spree in September, piling £129,000 on average into just five short-dated UK bonds, according to AJ Bell.

As a result, AJ Bell said that UK bonds with low yields made up five of the ten most popular investments bought by DIY investors in September. 

This is thanks to a tax-friendly aspect that means bonds bought below par can deliver a capital gains tax-free return when their face value is paid out.

Demand for short-dated UK bonds has reached a fever pitch, with wealth managers and investment platforms observing investors rushing to add them to their portfolios over the last year. 

Investors piled £129,000 into five UK Government Bonds on AJ Bell’s platform

Investment platform interactive investor also recently reported an uptick in demand for this type of investment – with a whopping 721 per cent increase in fixed income trading – of which UK bonds are a type – this year, to the beginning of September, compared to same period last year.

AJ Bell observed that strong demand for UK bonds is a trend which has been building across the summer.

The most popular UK bonds bought by AJ Bell investors in September were those maturing between January 2024 and January 2026.

What’s behind the gilts rush?

Investors anticipating the peak of the interest rate cycle has likely stirred up demand for newly-issued or more recent UK bonds but those snapping up older low-yielders are targeting cut price bonds with tax-friendly yields to maturity.

Laith Khalaf, head of investment analysis at AJ Bell explains: ‘As inflation has moderated and the Bank of England has taken its foot off the brake with a pause in interest rate hikes, short-term yields have dipped over the summer. 

‘This has probably prompted some investors to take action to lock in yields in case they fall further.’

But another more compelling reason for such demand for UK bonds is that, depending on the level of tax you pay, some which have short maturity dates can give a better guaranteed rate of return than the best savings accounts.

This is because investors buying them at below par prices can pick up £100 in the near future for considerably less now – and turn an almost cast-iron future profit capital gains tax-free.

Khalaf says: ‘Combined with the fact that the most popular bonds are short-dated and with low coupons, this suggests investors are buying gilts as an alternative to cash to save tax.

‘Gilts aren’t subject to CGT, so those bonds with low coupons which rely on a high capital return will be liable to very little taxation, just income tax on the small interest received.

‘This compares to a savings account where the interest might be taxable at 20 per cent, 40 per cent or 45 per cent.

‘So if the yields are similar, gilts are more tax efficient for those who have breached their personal savings allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers and £0 for top rate taxpayers). Given prevailing cash rates and yields, it’s easy to see why some savers are indulging in gilty pleasures.’

Investors usually buy government bonds through funds but can buy individual gilts through an investment platform like Hargreaves Lansdown, AJ Bell, Interactive Investor or Killik & Co, although this often isn’t as easy as buying shares or funds.

This post first appeared on Dailymail.co.uk