Surge in advisers shopping for UK authorities bonds for purchasers | USAEMALL.com

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Financial advisers have been snapping up UK government bonds on behalf of their clients to meet surging demand, as investors seek attractive income streams and tax-free gains.

UK government borrowing costs have jumped in the past few months to a 16-year high in January, in part because of concerns that the UK is facing weaker economic growth and higher prices.

But bond yields, which move inversely to prices, eased last week as the Bank of England cut its base interest rate by a quarter point to 4.5 per cent.

According to retail investment site AJ Bell, adviser purchases of gilts through its platform rose by a third in January compared with the previous month. Last year, the number of adviser gilt purchases through AJ Bell’s dealing service jumped by 436 per cent.

Gilts held directly in trading accounts are exempt from capital gains tax, meaning bonds trading below their face value can deliver tax-free returns for investors who redeem at maturity or sell above the purchase price. Regular interest payments, or coupons, are taxed as income unless held in a tax-free wrapper.

“Advisers are increasingly turning to gilts due to high yields by historic standards, but also to protect their clients from a capital gains tax bill,” said Mark Rendle, a director at AJ Bell.

“Gilts are exempt from CGT and where a client has a large sum to pay, such as with the sale of a business, it can be efficient to use short-dated gilts to phase into the market or to hold part of that sum back to pay a tax bill without taking any capital risk.”

Jonny Black, chief commercial and strategy officer at Abrdn Adviser, said the company experienced an 84 per cent increase last year of advisers buying bonds, the majority of which were gilts.

Evelyn Partners, one of the UK’s largest wealth managers, said its investment managers have a “preference for gilts over US Treasuries recently, given the attractiveness of nominal yields which spiked a month ago but have eased back a bit since.”

Jason Hollands, a managing director at Evelyn, said gilts issued during the period of ultra-low interest rates pay “very low levels of fixed interest” but are available at prices below the level they will be redeemed at on maturity.

As a result, the lion’s share of returns will come from capital gains rather than interest. He said that this is “very attractive” to a higher or additional-rate taxpayer compared to a cash savings account.

Hollands said that one such gilt, due to mature in October 2026 at £100, pays a low fixed interest coupon of 0.375 per cent, but is available to buy at £94.27.

“So an investor buying today knows they will make a capital gain if they hold to maturity when it redeems at £100 in October next year,” he added.

St James’s Place advisers ploughed £17mn of their clients’ money through its discretionary fund manager into gilts last month — a “significant increase” on the previous month, according to SJP. The majority was invested in two-year gilts, and some constituted reinvestment after the January 2025 gilt matured. SJP said it had started “to see an increased appetite” for five-year gilts in the first week of February.