Marketing

Time to boost retail access to gilts


Buying gilts can bring huge tax advantages for retail savers. But the process is so complicated that it’s mainly wealthier individual investors, with greater funds and knowledge at their disposal, who can easily access this fiscal largesse.

That’s unfair, especially when rising rates and wobbly equity markets have made purchasing gilts a better bet than at any time in the past decade.

The authorities should make it easier for individual savers of more modest means or with less financial experience to buy British government bonds. Otherwise, the tax perk will look increasingly indefensible.

We know there’s been a rush of people buying gilts this year. A government-appointed dealer for UK debt said its retail trading volume in July was 19 times higher than the same month last year.

But the number of individuals buying gilts directly is tiny. The Office for National Statistics estimated that UK households owned £3.6 billion (€4.2 billion) of gilts at the end of March – a sliver of the UK’s £1.5 trillion savings market and only 0.2 per cent of total UK government debt.

For the uninitiated, buying gilts is not easy. The first step of setting up an account on an investment platform is straightforward, but picking the right gilt is not – unless of course you work in the industry, follow it closely or have an adviser.

When you look up a list of gilts at any big UK broker you’ll typically be presented with the coupon it pays, the interest rate on the bond’s face value, the maturity date and the current market price.

All gilts mature at £100, so if the price is quoted under £100, you can work out what the capital gain will be if you hold the bond to maturity.

But unless you have access to a data terminal, you’d have to combine the capital gain and coupon yourself to work out what the yield is to be able to compare returns to savings accounts and other investment products.

The next challenge is working out which will prove most tax-efficient. If you are saving within your £20,000 annual individual savings account allowance, you don’t need to worry about tax.

But for those with larger savings, you pay income tax on coupons paid at your marginal tax rate, but no capital gains tax on any capital uplift at maturity.

‘There’s no farming without profit, it’ll be gone in the morning if there isn’t money’

This means you need to buy the gilts issued before interest rates started going up and have very low coupons, so the majority of the return comes in tax-free capital appreciation. As the chair of a private bank told me, pick the right gilt and “if you pay tax at 45p in the pound you are just laughing all the way to the bank”.

To put some numbers to it, a popular gilt this year has been the January 2025 bond which pays a coupon of 0.25 per cent. With the bond currently priced at £93.24, the yield after tax for a higher-rate taxpayer would be 5.07 per cent and 5.06 per cent for an additional rate taxpayer, according to Zoe Gillespie, a director at RBC Brewin Dolphin.

If the bondholder had to pay income tax on the capital uplift as well as the coupon, the yield would have to be 8.46 per cent for higher-rate taxpayers and 9.20 per cent for additional-rate taxpayers for the saver to achieve the same net yield. This is known as the “gross equivalent yield”.

That’s a lot higher than returns available from National Savings & Investments – the UK government’s retail savings channel – where a one-year guaranteed growth bond pays a gross interest rate of 5 per cent but will fall within your taxable allowance.

Less financially savvy people might choose to buy a gilt fund instead of individual gilts – but then you lose the tax advantages as all income or gains from the fund will be taxable.

In an ideal world, the UK government could consider scrapping the capital gains tax advantage for gilts, bringing them closer in line with other savings and investment products.

But there is a strong case now for keeping the tax perk, for much the same reason as when it was first brought in by then-chancellor Roy Jenkins in 1969 to make UK debt “more attractive to investors and encourage a more active market in gilts”.

The UK wants to issue a huge amount of debt this financial year – about £240 billion – or about three times the government’s average over the past decade, net of the Bank of England’s sales and purchases.

A healthy flow of retail money could help ease sales. It might also crank up pressure on the banks to make sure they offer depositors competitive savings rates. And it could add diversity to a market which has been vulnerable to domination by big institutions, as demonstrated in last September’s gilts turmoil.

So if the tax break is to stay, the fair way forward is to make the market more accessible.

Fortunately, we wouldn’t have to reinvent the wheel. The UK could turn to Italy for ideas. The Italian government started issuing bonds specifically targeted at individual savers in 2012 with “BTP Italia”, which include inflation-linked returns.

More recently, at the height of the coronavirus pandemic, Italy issued its first “BTP Futuras” for retail investors with returns linked to economic growth. And in June this year came the first “BTP Valore” bond, which pays a premium if you hold it to maturity.

These bonds can be bought through post offices, major banks and on investment platforms, with the government raising awareness through TV commercials and online ads.

There is also a tax incentive, with Italian government bonds taxed at about half the rate of other Italian savings and investment products.

“We would see BTP Italias as a big success given the amount issued and the frequency of issuance in recent years,” says Giovanni Daprà, the co-founder of online brokerage Moneyfarm.

About €30 billion has been raised through the retail channel this year – about 20 per cent of total Italian government bond issuance, excluding debt issued with a maturity of less than one year.

Of course, any such policy would have to be adapted from Mediterranean to Atlantic conditions. But raising awareness of gilts among retail investors would benefit savers and the government alike. – Copyright The Financial Times Limited 2023



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