Buying UK short term gilts as a tax shelter?

TUVOK

Hello,
Although I am a long term investor in most area's I have never ventured into buying gilts on the market, my exposure has been solely through bond funds.
I have recently been concerned about my increasing HMRC taxation as I have used all I can, i.e. ISA's and premium bonds, I have no wish to go into VTR's.
I have recently viewed a video about tax sheltering and short term UK gilts, the reason given was to buy short term UK gilts at the lowest interest rate, thus keeping tax down and just relying on the coupon value which as I understand it is tax free?
Have I understood this position correctly please?
Any advice, hints. comments would be very welcome as I understand very little about holding gilts either as a tax shelter or for profit.
Thank you.

gravel_2

I suspect you've misapplied the "coupon" label - coupon is the interest rate paid on the gilt. This IS subject to income tax (and modification by accrued interest scheme). Hence, if looking to keep tax to a minimum relative to the overall yield, you want as low a coupon as possible and for most of the yield to be derived from the delta between the price you pay and the redemption price.

What is tax exempt is the gain you make when selling the gilt or allowing it to redeem.

kempiejon

TUVOK said:

Hello,
Although I am a long term investor in most area's I have never ventured into buying gilts on the market, my exposure has been solely through bond funds.
I have recently been concerned about my increasing HMRC taxation as I have used all I can, i.e. ISA's and premium bonds, I have no wish to go into VTR's.
I have recently viewed a video about tax sheltering and short term UK gilts, the reason given was to buy short term UK gilts at the lowest interest rate, thus keeping tax down and just relying on the coupon value which as I understand it is tax free?
Have I understood this position correctly please?
Any advice, hints. comments would be very welcome as I understand very little about holding gilts either as a tax shelter or for profit.
Thank you.

I did the research a year or two ago. With a low allowance before cash becomes due on interest and dividends and my shelters filled I looked for other ideas for cash/cash like holdings. I have premium bonds, ISA and SIPP.
Have you filled your SIPP?
Here's what I understand. UK government gilts are exempt of capital gains tax. Gilts are issued with an expiry date. Holders at that date you get back the principal - usually £1 per gilt. Gilts trade on the market and the price is made by the market. It is possible to buy a gilt that will return £1 at a know date in the future. You can buy that £1 gilt for market price, sometimes below the principal. 
There is interest paid on gilts and there would be tax to pay on that so pick the gilt where the return comes from capital not the interest. 
for example I see on https://www.yieldgimp.com/gilt-yields that T26 (6th down the list) has traded at around 94.5p, it matures 30/01/2026 and holders get back £1. In the meantime it pays interest at 0.625%.
It would be a place to park cash for 18 months and get a capital uplift of about 5% tax free.
One buys individual gilts much like individual shares, different brokers have different specific methods. I had to place an at best trade. Others I hear have to make phone orders. 

Linton

You may well find that the gain from short term gilts after charges will be less than the gains you could make from other investments even after tax.  For example HL say that most gilts can only be bought by phone with dealing charges of 1% with the charges being bounded: £20 Minimum, £50 maximum.  Plus, depending on the platform, there will be charges for holding the gilts as well. 

There is a requently stated saying in investment circles: "dont let the tax tail wag the investment dog".  In other words choose the appropriate investments first and then get the rewards at minimum tax.  Not the other way around.  If you are a long term investor why buy short term gilts?  When the first lot have matured you will have to buy replacements.  If you want to buy gilts at all it makes more sense to buy them with maturities in line with your needs for cash.

The best place for long term investments depends on your circumstances but for most people it is their pension.   Tell us more about your circumstances and perhaps we can make more specific suggestions.

kempiejon

Linton said:

The best place for long term investments depends on your circumstances but for most people it is their pension.   Tell us more about your circumstances and perhaps we can make more specific suggestions.

Ah, yes. And other good points made in the rest of your post about the tax tail and charges but under the right circumstances I think there's a place for gilts.

For @TUVOK I uses gilts for short term stores of cash to prevent paying tax on interest in savings accounts. Gilts pay a known capital amount at a known date. Much like a fixed term cash savings bond/account. I do not use them for investment with a the prospect of growth but as a place to park cash without paying tax. I have known amounts and maturity dates set over the next few years.

InvesterJones

Linton said:

You may well find that the gain from short term gilts after charges will be less than the gains you could make from other investments even after tax.  For example HL say that most gilts can only be bought by phone with dealing charges of 1% with the charges being bounded: £20 Minimum, £50 maximum.  Plus, depending on the platform, there will be charges for holding the gilts as well. 

There is a requently stated saying in investment circles: "dont let the tax tail wag the investment dog".  In other words choose the appropriate investments first and then get the rewards at minimum tax.  Not the other way around.  If you are a long term investor why buy short term gilts?  When the first lot have matured you will have to buy replacements.  If you want to buy gilts at all it makes more sense to buy them with maturities in line with your needs for cash.

The best place for long term investments depends on your circumstances but for most people it is their pension.   Tell us more about your circumstances and perhaps we can make more specific suggestions.

100% with the intention/guidance here, but to correct the first paragraph, almost all gilts at HL can be bought online with the usual sliding scale flat rate dealing charge (which was refunded during an offer period recently, sadly finished) - no fee if held in GIA either.

aroominyork

kempiejon said:

TUVOK said:

Hello,
Although I am a long term investor in most area's I have never ventured into buying gilts on the market, my exposure has been solely through bond funds.
I have recently been concerned about my increasing HMRC taxation as I have used all I can, i.e. ISA's and premium bonds, I have no wish to go into VTR's.
I have recently viewed a video about tax sheltering and short term UK gilts, the reason given was to buy short term UK gilts at the lowest interest rate, thus keeping tax down and just relying on the coupon value which as I understand it is tax free?
Have I understood this position correctly please?
Any advice, hints. comments would be very welcome as I understand very little about holding gilts either as a tax shelter or for profit.
Thank you.

There is interest paid on gilts and there would be tax to pay on that so pick the gilt where the return comes from capital not the interest. 
for example I see on https://www.yieldgimp.com/gilt-yields that T26 (6th down the list) has traded at around 94.5p, it matures 30/01/2026 and holders get back £1. In the meantime it pays interest at 0.625%.
It would be a place to park cash for 18 months and get a capital uplift of about 5% tax free.

That "5% tax free" is inaccurate/unhelpful. Let's look at annual rates. https://www.dividenddata.co.uk/uk-gilts-prices-yields.py shows the annual return as 3.945%. Deduct tax on the coupon, eg 20% or 40% of 0.625%. Then check the actual buying cost: the mid-price is 94.45p but the actual cost will be a little higher (and if you sell before maturity the selling spread will also affect you) and then take into account trading costs. I'm not trying to deter you - I am using gilts as proxy cash - just checking you understand the detail.

kempiejon

aroominyork said:

kempiejon said:

There is interest paid on gilts and there would be tax to pay on that so pick the gilt where the return comes from capital not the interest. 
for example I see on https://www.yieldgimp.com/gilt-yields that T26 (6th down the list) has traded at around 94.5p, it matures 30/01/2026 and holders get back £1. In the meantime it pays interest at 0.625%.
It would be a place to park cash for 18 months and get a capital uplift of about 5% tax free.

That "5% tax free" is inaccurate/unhelpful. Let's look at annual rates. https://www.dividenddata.co.uk/uk-gilts-prices-yields.py shows the annual return as 3.945%. Deduct tax on the coupon, eg 20% or 40% of 0.625%. Then check the actual buying cost: the mid-price is 94.45p but the actual cost will be a little higher (and if you sell before maturity the selling spread will also affect you) and then take into account trading costs. I'm not trying to deter you - I am using gilts as proxy cash - just checking you understand the detail.

OK rather than "It would be a place to park cash for 18 months and get a capital uplift of about 5% tax free." I was being lazy to cast the broad idea.
You've put it much better.

aktivemac

Linton said:

You may well find that the gain from short term gilts after charges will be less than the gains you could make from other investments even after tax.  For example HL say that most gilts can only be bought by phone with dealing charges of 1% with the charges being bounded: £20 Minimum, £50 maximum.  Plus, depending on the platform, there will be charges for holding the gilts as well. 

There is a requently stated saying in investment circles: "dont let the tax tail wag the investment dog".  In other words choose the appropriate investments first and then get the rewards at minimum tax.  Not the other way around.  If you are a long term investor why buy short term gilts?  When the first lot have matured you will have to buy replacements.  If you want to buy gilts at all it makes more sense to buy them with maturities in line with your needs for cash.

The best place for long term investments depends on your circumstances but for most people it is their pension.   Tell us more about your circumstances and perhaps we can make more specific suggestions.

Above definitely well-intention & often right regarding not chasing tax savings at expense of good investments, etc. But if you are in a position of fully utilising other tax efficient options, then this both makes sense and is a pretty good investment (if you're a higher or additional rate tax payer).

Firstly, the dealing charge is a bit of a red herring as you can buy Gilts on HL for c.£12.

Secondly, on the investment itself, as others have said if you buy say the TN26 gilt which matures in Jan-26. It has limited coupon/interest payments that would be taxed so most of the return comes from the capital gain at maturity that is tax free. So based on current price you can make an annualised return of just over 4% - which on the face of it seems low or in-line with standard cash savings accounts. But if you're a 45% taxpayer then a 4% savings account actually pays closer to 2.25% after tax. Whereas the 4% here is post-tax, so its like putting your money in a savings account that pays nearly 8%. And given its UK Govt gilts its guaranteed fully & not subject to the £85k FSCS protection limit. Lots of things to like.

kempiejon

The dealing charge is a read herring for someone saving >>£1000.    It is significant for someone investing less.

I can see using short duration gilts to minimise tax could be very worthwhile compared with savings accounts for a wealthy high-income investor with £££ to invest.    Is the OP in that position? We dont know. But I dont think it is appropriate for someone with little knowledge who needs to ask the questions.

tbh I cannot see a high-income investor being that interested in fixed rate, fixed term cash accounts anyway.

Ah but the OP has filled premium bonds and ISA as per the post so already has £70k minimum saved, much more if they've been ISAing for a few years. Low coupon gilts are a bit of a waste of allowances, better off held outside of shelters. However I have gilts in my SIPP with maturities to match my spend for a couple of years.

Those saving less that £1000 will not be bothered by tax on interest savings so wouldn't look at gilts as a way to minimise that. It's only £5 to buy gilts with iWeb, no fee to sell as you hold to maturity.
Although you cannot see it I don't think you can state with any certainty state that high income, high net worth investors wouldn't use use fixed term cash rates. They surely do.

Anyhow @TUVOK you've a little more info now. There's plenty more reading, I found all I needed to know hunting online - here's another article https://www.thisismoney.co.uk/money/diyinvesting/article-12503819/Why-investors-snapping-short-dated-gilts-yielding-0-25-tax-friendly-benefits-low-rate-bonds.html

Linton

aktivemac said:

Linton said:

You may well find that the gain from short term gilts after charges will be less than the gains you could make from other investments even after tax.  For example HL say that most gilts can only be bought by phone with dealing charges of 1% with the charges being bounded: £20 Minimum, £50 maximum.  Plus, depending on the platform, there will be charges for holding the gilts as well. 

There is a requently stated saying in investment circles: "dont let the tax tail wag the investment dog".  In other words choose the appropriate investments first and then get the rewards at minimum tax.  Not the other way around.  If you are a long term investor why buy short term gilts?  When the first lot have matured you will have to buy replacements.  If you want to buy gilts at all it makes more sense to buy them with maturities in line with your needs for cash.

The best place for long term investments depends on your circumstances but for most people it is their pension.   Tell us more about your circumstances and perhaps we can make more specific suggestions.

Above definitely well-intention & often right regarding not chasing tax savings at expense of good investments, etc. But if you are in a position of fully utilising other tax efficient options, then this both makes sense and is a pretty good investment (if you're a higher or additional rate tax payer).

Firstly, the dealing charge is a bit of a red herring as you can buy Gilts on HL for c.£12.

Secondly, on the investment itself, as others have said if you buy say the TN26 gilt which matures in Jan-26. It has limited coupon/interest payments that would be taxed so most of the return comes from the capital gain at maturity that is tax free. So based on current price you can make an annualised return of just over 4% - which on the face of it seems low or in-line with standard cash savings accounts. But if you're a 45% taxpayer then a 4% savings account actually pays closer to 2.25% after tax. Whereas the 4% here is post-tax, so its like putting your money in a savings account that pays nearly 8%. And given its UK Govt gilts its guaranteed fully & not subject to the £85k FSCS protection limit. Lots of things to like.

I see no problem with experienced, high-income, wealthy investors holding individual low interest gilts for longer term cash holdings, the duration being compatible with the need for the cash..  They certainly do have significant CGT tax advantages.

However we dont seem to be in that situation.  The OP is proposing short duration gilts purely as a tax avoidance trategy presumably compared with fixed rate savings accounts.  If we are talking about lump sums of the order of £1K the charges for buying are comparable with the tax savings.

When we know more about the OPs circumstances we can make a better judgement.