Buying UK short term gilts as a tax shelter?

aktivemac

Linton said:

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.

Fully agree - low coupon gilts mainly make sense for high tax bracket savers (so no interest allowance) with relatively large amounts to save (so dealing costs aren't a factor). In my mind they should be viewed for these investors as better / more efficient vs. fixed rate savings accounts. Given OP mentions having maxed out their ISA & premium bonds (so min £70k already saved), I assumed we were in this zone. But as you correctly say, will all depend on OPs circumstances.

zagfles

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. 

Why they say that on their web page is beyond me as you can buy all normal gilts online with HL at a cost of £11.95 and no charge for holding them unwrapped. It seems the only ones you can't buy online are the new style index linked gilts and strips.  

TUVOK

A big thank you for all the replies to my thread.
They have revealed some thinks I was not aware of and other facts that I had wrong.

I've got a lot of reading etc to do over the weekend and I'll reply then.

Thanks to all.

TUVOK

Firstly my apologies for the delay in answering the members who took the time to answer my post, afraid a nasty dose of covid meant I have felt like doing nothing for some time!
Now to try to answer some of your points raised.
I am fully loaded with regard to ISA's, SIPP and premium bonds, so am liable for taxation on all held outside of these.
I have a state pension and two private pensions, so I am fortunate to have excess money available each month.
Hopefully I have explained my current financial situation enough to help any replies.
I do have some spare cash in one ISA, so could purchase gilts at a high % coupon.
I am more interested in how, where to buy and the cost of purchasing low coupon UK Gilts outside of any tax shelter.
As I understand it I can view what is available looking at the United kingdom Debt management Office.
I also understand that you can purchase UK Gilts on a primary and secondary market.
I was initially interested in purchasing on the primary market, as i understand it there are currently 7 firms who offer their service for these purchases, I hold two of them as a platform, namely HL and A.J.Bell .

At the moment I cannot fully understand how I can purchase UK Gilts without incurring heavy charges thus making any purchase a loss on maturity due to the dealing and platform charges, If I understand this ? please correct me and explain what ever.
With regard to the secondary market I understand this even less, again I would be very grateful to experienced UK Gilt purchasers how they go about buying in more detail and also how do they not make a loss.

Thanks for any replies, they would be most appreciated to me in trying to understand this type of investment.  

kempiejon

TUVOK said:

 /...  I hold two of them as a platform, namely HL and A.J.Bell .

/...
At the moment I cannot fully understand how I can purchase UK Gilts without incurring heavy charges thus making any purchase a loss on maturity due to the dealing and platform charges, If I understand this ? please correct me and explain what ever.
With regard to the secondary market I understand this even less, again I would be very grateful to experienced UK Gilt purchasers how they go about buying in more detail and also how do they not make a loss.

Thanks for any replies, they would be most appreciated to me in trying to understand this type of investment.  

@tuvok

Couple of quick Qs.

You said you are fully loaded with SIPP ISA and PBs. So as well as your PBs you add £20k each year to an ISA plus the max to SIPPs. That means you are adding the fully amount of your relevant earnings less any already accounted for pensions contributions? All your residual salary goes into SIPP?

You already have AJ Bell and HL. Do you use them to buy individual shares?
Gilts are a bit like shares, AJ Bell £5 per trade. Hold to maturity.
https://www.ajbell.co.uk/our-services/investment-options/gilts/prices I click on the buy button, you get a quote, can accept or decline, that's about it. (did you understand clean and dirty prices, accrued interest in your weekend reading?) details here https://www.hl.co.uk/news/most-bought-gilts-government-bonds-in-august-2023.

Dealing in gilts in HL is £11.95.  

Pick AJB and that £5 is not a heavy charge, hardly moves the needle on reasonably sized purchases. Unless you were going to drip a few hundred each month to a regular gilt purchases - that's not a good plan.

TUVOK

Couple of quick Qs.

You said you are fully loaded with SIPP ISA and PBs. So as well as your PBs you add £20k each year to an ISA plus the max to SIPPs. That means you are adding the fully amount of your relevant earnings less any already accounted for pensions contributions? All your residual salary goes into SIPP?

Yes, each year utilise full £20K isa allowance.
Unable to put more into Sipp as over age for funding it.

You already have AJ Bell and HL. Do you use them to buy individual shares?

No, they are both ISA only, mainly funds with 2 IT's

Pick AJB and that £5 is not a heavy charge, hardly moves the needle on reasonably sized purchases. Unless you were going to drip a few hundred each month to a regular gilt purchases - that's not a good plan.

What would you say a reasonably sized purchase is in order to decrease overall cost of purchase?

, that's about it. (did you understand clean and dirty prices, accrued interest in your weekend reading?) details here https://www.hl.co.uk/news/most-bought-gilts-government-bonds-in-august-2023.

No, afraid not as yet.

Thanks for your interest and reply, hope you can answer my queries, much appreciated. 

InvesterJones

TUVOK said:

Pick AJB and that £5 is not a heavy charge, hardly moves the needle on reasonably sized purchases. Unless you were going to drip a few hundred each month to a regular gilt purchases - that's not a good plan.

What would you say a reasonably sized purchase is in order to decrease overall cost of purchase?

Well the cost of purchase is fixed, so every increase in size of purchase decreases the proportion you pay in fees (but doesn't affect the absolute cost).

Up to you what you consider a reasonable proportion. £5 for a £1,000 purchase is 0.5%. For a £10,000 it's 0.05%. For a £100,000 purchase it's 0.005% and so on. Many platforms don't charge anything extra for platform fees for Gilts held in a general account, nor should there be a charge for withdrawing the money when it matures (also no charge).

kempiejon

What would you say a reasonably sized purchase is in order to decrease overall cost of purchase?

@TUVOK Obviously as the fee is fixed the bigger the lump sum the smaller the percentage dealing is.
If I was earning say a 4% per annum return tax free from short dated gilts bought below par and held to maturity over about 2 years and bought a £10k holding a fiver is insignificant.
Do the same thing with £300 per month and those fivers wipe out a bigger portion of gains.

Each gilt has a different price, coupon and duration so individual calculations apply. For me I want to park cash in a way to remove it from any tax liability after PBs, ISAs and SIPP gilts are the last refuge. Our prevailing tax rates apply so will influence actual size of returns/savings.

If you have not used your broker to buy shares before and only buy funds, gilts will be alien. I've been buying individual shares for years so the swap to gilts was pretty trivial for me but more complicated than just picking a share.

kempiejon

Ooh, while I remember, particularly for those already holding unsheltered shares and adding gilts as a place to park cash safely to reduce tax on interest ones capital gains allowance is used. The increase in value between buying below par and the gilt redeeming at par is a capital gain. So while savings interest allowance is £500/£1000 which low income gilts would be subject to these low coupon gilts would also be subject to capital gains, where the allowance is £3000.

gravel_2

kempiejon said:

Ooh, while I remember, particularly for those already holding unsheltered shares and adding gilts as a place to park cash safely to reduce tax on interest ones capital gains allowance is used. The increase in value between buying below par and the gilt redeeming at par is a capital gain. So while savings interest allowance is £500/£1000 which low income gilts would be subject to these low coupon gilts would also be subject to capital gains, where the allowance is £3000.

Isn't this contrary to the primary benefit of owning gilts - that their redemption or disposal does not attract CGT?