- Bank of England holds base rate at 4.25% but the market is pricing in cuts later in the year
- Three members of the MPC voted to cut the rate to 4%
- Central bank interest rates influence the return available from lower-risk asset classes such as bonds as well as savings accounts
- Short dated gilt yields remain attractive and are a highly tax-efficient cash proxy
- AJ Bell Investcentre’s ‘Gilt MPS’, launched in April, provides advisers with a low-cost and accessible solution to recommend gilts to clients
“Gilts are growing in popularity among retail investors as they look for alternatives to cash, and this trend is likely to be supported by future rate cuts from the Bank of England, says Ryan Hughes, AJ Bell investments managing director.
“Short-dated, low coupon gilts trading below par in particular offer an extremely attractive option for clients, with the tax advantaged treatment of gains at redemption making them a compelling alternative to cash or near-cash assets for clients seeking risk free returns.
“As the base rate eventually comes down and cash interest rates follow, advisers are well positioned to support clients looking for alternative ways to protect capital while earning a secure return in a highly tax efficient manner. This is particularly relevant for higher and additional rate taxpayers when considering the gross equivalent yield vs a savings account.
“AJ Bell’s Gilt MPS brings a ‘ladder’ approach, offering gilts with a range of maturity options to advisers and their clients. Clients can benefit from a secure and reliable return with a minimum investment value of £10,000, and very low charges at just 0.10% per annum.”
Gilt MPS explained:
AJ Bell Investcentre’s Gilt MPS, designed for advisers and their clients who are looking to invest in a tax efficient MPS, features short dated gilts issued with a low coupon which trade on discounts to par.
These low coupon gilts benefit from a large element of their total return coming from capital growth at maturity, which is free from capital gains tax. Only the income element from the interest received will be subject to tax at the investors’ marginal rate. Tax treatment depends on individual circumstances and rules may change.
There are three portfolios in the AJ Gilt MPS range.
- Gilt MPS 1 contains two issues that mature between now and October 2026
- Gilt MPS 2 contains three issues that mature between now and July 2027
- Gilt MPS 3 contains four issues that mature between now and January 2028
The portfolios are designed to be held until maturity to benefit from pull to par, and offset fluctuations and interest rate changes.
As each gilt matures, advisers have the option of withdrawing the proceeds or rebalancing into a new portfolio. When only one issue remains in a portfolio, assuming that issues are still trading at a discount to par, a new four year portfolio will be launched.
Interest payments are made every six months, offering a secure income stream. The Gilt MPS is available in three different maturity preferences, allowing advisers to choose an investment time horizon and gilt maturity dates that suit their clients’ needs.
The tax attraction of the Gilt MPS:
Gilts are particularly effective for higher rate taxpayers, as capital returns are free from capital gains tax and short dated low coupon gilts can offer favorable yields through capital appreciation.
Buying gilts which trade below par, such as those in the Gilt MPS, means returns can be significantly higher than can be earned from traditional fixed rate savings account.
Source: AJ Bell Investments. Illustrative example, Tax equivalent yield on 1 year gilt, 40% taxpayer