Uncover the Secret to Joining Gilt Buyers and Skyrocket Your Yields!

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Private investors have bought government bonds in record volumes in recent months, as juicy yields and a favorable tax treatment provide far more attractive returns than many savings accounts.

However, the overall numbers are low compared to the demand for standard savings products. Gilts are more complex than savings accounts, and if you sell one before its maturity date, you could lose money if the bond’s price has fallen.

But they are also backed by the government and with short-dated bond yields matching theirs the highest level since 2008 this week, at more than 5% for a two-year bond, investor interest continues to soar.

How can I buy one?
Gilts are traded on the London Stock Exchange and can be bought through investment platforms such as Hargreaves Lansdown, AJ Bell or Interactive Investor in the same way you buy a share in a company or an Exchange Traded Fund.

They are quoted indicating the bond’s maturity date, as well as the coupon, which is the percentage of your investment that will normally be paid as income in semi-annual installments.

All gilts redeem at £100, so if the quoted price is below £100 you will receive a profit when the bond matures. The coupon level will depend on when the bond was issued, with low coupon bonds offering higher principal gains to maturity than higher coupon securities with a similar maturity date.

Be careful when selecting a gilt, as many investment platforms don’t make clear the yield available.

How do I choose a golden?
The most popular gilts currently are those maturing within the next two years and paying a low coupon, according to Interactive Investor, which says bonds maturing in January 2024 and 2025 are its top two most-bought gilts.

Under normal market conditions, yields – which combine coupon and principal appreciation or loss at maturity to represent an equivalent annual rate – will be higher for longer-dated bonds as investors demand a higher rate to the loan for an extended period of time.

However, shorter-dated bonds currently offer higher yields than longer-dated ones, as investors bet that the Bank of England will be forced to cut interest rates in the face of a recession.

Ben Yearsley, a financial planner at Shore Financial Planning, said he increased his gilt that matures in January 2025, because it has a low coupon rate and most of the returns come through capital gains. “With a 5 percent return and most tax-free, it’s kind of a no-brainer,” he says.

How does the tax treatment work?
You can hold a gilt in an individual savings account, in which case no tax is payable. In a regular investment account, the tax advantage is that while income tax is payable on the coupon, no tax is paid on the increase between the buy and sell price – or its maturity value – regardless of band. tax of the bondholder.

This means that discounts on short-dated bonds with a low coupon value currently offer the most obvious tax advantages.

On 22 June, for example, the bond dated 31 January 2025 paid a coupon of 0.25% and traded at £92.40, giving an equivalent annual yield, before tax, of 5.28%.

This is lower than the best available 18-month fixed rate deal available on the Moneyfacts website, which offers a 5.6% rate.

But when taxes have to be paid – after an Individual Savings Check and the £1,000 Personal Savings Check have been used up – the gilt becomes more attractive, particularly to taxpayers with higher and additional tax rates.

Zoe Gillespie, director of RBC Brewin Dolphin, calculated that the after-tax yield on the bond due January 31, 2025 was 5.17% for higher rate payers and 5.16% for higher rate payers with an additional rate.

If the bondholder had to pay income tax on both the capital increase and the coupon, the yield would be 8.62 percent for higher-rate taxpayers and 9.38 percent for higher-rate taxpayers. taxpayers with an additional rate for the saver to obtain the same net return — known as the “gross equivalent return”.

Should I buy a bond fund instead?
Bond funds can be an easier way to gain exposure to higher yields, with a blended maturity across the portfolio that smooths out volatility and the ability to continue owning the fund without it expiring.

However, you don’t get tax benefits by buying a fund, and you can’t lock in a fixed rate, as the price will depend on when you choose to sell.