A strange time to talk about capital gains tax on gilts1 – after two years of historic losses from government bonds!

Forget gains! Just not losing money would be nice for a change, right?

Okay, so most Monevator readers will know that bonds have had a bad run. That their prices began to fall as inflation and interest rates took off. And that gilts then cratered in the wake of the 2022’s disastrous Mini Budget.

But the less appreciated thing is that gilts – and other bonds – fell so sharply that their expected return profile has now changed dramatically.

At the start of 2022, gilts were trading well over par.2 Investors hungry for yield had bid up gilt prices for a decade.

This meant a capital loss was guaranteed, sooner or later, because the money you’d get back when the gilt was redeemed would be less than you’d paid when you bought the gilt above par value.

Now though, most gilts are priced below par.

So as well as the regular coupons you receive as a holder of a gilt – interest, essentially – you’ll also make a profitable capital gain if you own the gilt when it matures.

Gilts: a turnaround story

This all matters a lot for investment – not least because we’re hearing lots of readers talk about dumping their UK government bonds.

Even passive investors!

Caught between a rock and a hard place in trying to diversify their portfolios, people held gilts for years even as the outlook for returns dwindled.

Now though, after a couple of terrible years for government bonds, some are throwing in the towel.

For example, Vanguard’s more bond-heavy LifeStrategy funds saw billions in net withdrawals in 2023.

However before you follow suit, do understand the reversal in gilts’ prospects.

Today even index-linked gilts are sporting a positive yield-to-maturity (YTM).

This means you can now guarantee a return above inflation, by buying and holding these government bonds until they mature.

In contrast, as recently as the end of 2021 you had to pay the government for the privilege of inflation-proofing your capital.

Very long duration index-linked gilts were on a YTM of negative 2%!

The picture is more opaque when it comes to government bond funds, which is how most people hold their gilts.

That’s because the funds hold a rolling stock of gilts, which are managed in order to maintain a steady duration.

However they own the same underlying securities – gilts – and the overall message is the same.

Gilt prices – and hence yields – will probably continue to be choppy, until the outlook for inflation and interest rates calms down.

But the important thing is not to judge UK government bonds by what they’ve done recently. Consider what they are priced to do in the future.

Nice curves

Vanguard foresees markedly higher expected returns from bonds from here:

Source: Vanguard

And here’s what M&G Investments’ pros – the self-styled Bond Vigilantes – had to say when the prospects for linkers turned positive:

Inflation protection is looking attractive (or sensible) again. The last month has pretty much seen the whole UK linker curve move from negative yields into positive territory.

This means that for practically any period of your choosing, you can now receive a guaranteed return above inflation, instead of paying for the benefit of owning that protection.

Again, given the current economic climate, this feels like an interesting trade for the long term investor.

You can see this in the following graph:

Don’t worry if talk about ‘curves’ and whatnot is a bit over your head.

The important point is that the green line – the YTM available after the sell-off in linkers – is above zero for all but the shortest duration index-linked gilts.

In contrast the yellow line shows that previously index-linked gilts were priced to deliver a negative return.

This shift (yellow to green) explains why your UK government bonds fell so far in 2022 and 2023.

But it’s also why longer-term returns should be much better now.

Capital gains and coupons

If you’re an active investor and you’re thinking about buying gilts for tactical reasons to exploit these shifts, you need to consider their return profile.

That’s because the way that capital gains tax on individual gilts works – there is none – means you might want to hold them outside of tax shelters.

This leaves more room in your ISAs and SIPP for your tax-liable stuff.

What’s more if you buy very short-term gilts, you could see a (tax-free) capital gain that is better than the (taxed) income you’d get with normal cash savings.

However if you struggle to fill your ISAs and SIPP, then you might skip the rest of this article. Buy your gilts inside tax shelters, where they are safe from income tax too, and fill your allowances!

Gilts versus gilt funds: Note that when I say gilts are capital gains tax-free, I’m referring to individual gilts. Gilt funds are a different matter – they are liable for capital gains tax – and index-linked gilt funds differ slightly again. See our article on how bonds and bond funds are taxed.

How you get paid when you invest in gilts

Remember there are two components to the return you earn from gilts.

The coupon

This is the fixed interest coupon the gilt pays every year. It varies by individual gilt issued.

For example ‘Treasury 0.125% 2039’ gilt will pay you 0.125% of its face value a year until 2039.

The redemption value

This is the amount you get back when a gilt is redeemed.

For example Treasury 0.125% 2039 has a par value of £100.

But as of October 2022, for example, Treasury 0.125% 2039 only cost £80 to buy.

Therefore if you bought this gilt and held it until 2039, you would make a £20 (25%) capital gain when it matured and was redeemed.

Note that prices are moving around a lot for gilts, so these prices may be long gone by the time you read this. Also spreads are wider than usual.

The important thing to grasp is there are two components to the return.

Combining the two: redemption yield, or yield-to-maturity

By far the most important yield to know about is the yield-to-maturity (YTM).

However the YTM is tricky to calculate, because it seeks to estimate your annualised return – taking into account both the coupon payments from the gilt and any capital return (or loss) on maturity.

Why is that so hard?

Think about it. I just told you that Treasury ‘0.125% 2039’ will be worth 25% more when it matures in 2039.

If you bought in 2022 and you could wait for 17 years then you were guaranteed to bank a profit.

However everybody in the gilt market also knows this. (My phone is not ringing off the hook as hedge funds beg me for more such secrets!)

We can therefore assume that the price will tend to move towards par value between now and 2039.

As we’ve been reminded in recent years though, the path towards par value won’t be smooth. Sometimes the gilt’s price will be up. Other times down. We can’t know exactly in advance.

Yet to do a YTM calculation, we – or a calculator – must make assumptions about reinvesting the coupon into a series of unknowable prices.

And that is what is difficult.

How to find out the yield-to-maturity (YTM) for a gilt

All that 99% of investors need to know is that the YTM provides the best guesstimate to the return you’ll get from a bond if you buy it today.

Moreover it’s not in the same category of finger-in-the-air guessing we do when we estimate future returns from equities. There’s solid maths behind the YTM calculation. Solid, but not 100% accurate, if that makes any sense.

But another snag is it’s hard to find yield-to-maturity quotes for free on the Net.

Retail sites typically quote coupons or running yields, which aren’t so helpful.

City pros use a Bloomberg.

However you can sign-up to download YTMs based on yesterday’s closing prices at TradeWeb. You need to register, but it’s free.

There’s no capital gains tax on individual gilts

At last we get to the much-trailed important bit about capital gains tax on gilts!

Remember, the yield-to-maturity is made of two components – the capital gain and income.

• For all investors, the capital gain portion is tax-free with gilts.

• Most investors will pay income tax on the coupon (outside tax shelters).

But here’s the cool bit…

Something that’s pretty clear in the name ‘Treasury 0.125% 2039’ is that the coupon is very small. It’s just 0.125%.

Moreover the interest you get from your coupon counts as savings income.

So savings income tax rates apply – including the starting rate for savings and the savings nil rate band.

This means you might not even be liable for income tax on the coupon, in some circumstances.

More usually though, the sort of person who buys individual gilts with their tax situation in mind will be paying income tax on savings.

Hence they will be interested in minimising the income coupon and maximising the tax-free capital gain.

How to pick gilts for fun and profit

In a nutshell: if you’re looking to buy and hold individual gilts to maturity, you want to pay attention to your tax situation – both now and in the future – before you decide which issues to buy.

We can assume all gilts have the same (extremely low) chance of default.

They’re all backed by the UK government, which can print its own money. It’s not like with other types of bonds or shares where you need to diversify.

So choosing a gilt based on the tax profile makes sense.

Compare and contrast

Everyone’s tax situation is different. But in general, higher and additional-rate taxpayers will want to look at short-dated gilts trading below par, with a low coupon but an attractive YTM.

This maximises the tax-free gains. The coupon is low, so not much return is lost to income tax. And the capital gain is tax-free.

You’ll also want to compare your after-tax YTM from gilts with that from cash savings, taking into account your particular circumstances.

Years ago you’d see suggestions as to which gilt would suit which bracket of taxpayers in print magazines.

Unfortunately though, I can’t point you to such a source today. (If anyone can, please let us know in the comments below.)

Note that if you sell your gilt before it matures for less than you paid for it – that is at a loss – you can’t set that loss against capital gains made elsewhere.

Individual gilts are outside the whole gains/losses merry-go-round from a capital gains tax perspective.

Gilts: down but not out

To recap, it has been an ugly spell for bonds of all types.

Inflation flared up, causing central banks to raise interest rates. That hammered bonds that had seemingly priced-in low rates forever.

The situation was made worse in the UK by the tumult around the Mini Budget and fears for the UK’s long-term finances.

We wrote on Monevator many times about the risks from government bonds trading at elevated levels, especially those of long duration.

For example:

• Why inflation-linked funds may not protect you from inflation (2016)
• How much will you lose if bond prices fall? (2020)
• Are bonds a good investment? (2021)

But that was mostly then – and this is definitely now.

Yes bonds could continue to chalk up dismal returns, in the short-term.

And while you can now get around 4% from a ten-year gilt – compared to 1% a few years ago – if high inflation sticks around for too long then the real return3 could still be disappointing.

So index-linked gilts seem to me an opportunity especially worth considering, given they offer a positive yield and inflation protection again.

Know what you’re buying into

Of course a measly 1% annual real return undoubtedly looks more attractive after a couple of years of rotten returns for UK bonds and shares.

Maybe shares will deliver 20% next year and you’ll regret piling into gilts for a 1% real return?

Maybe, but such speculation is for another day – and mostly another website.

The point is the return outlook for UK government bonds is brighter than it was. The pasting suffered by bond investors since the end of 2021 has made their prospects much brighter going forward.

Never dismiss an asset class just because it has had a spell in the dumpster.

And if you want to buy individual gilts, be sure to consider capital gains tax.

1. UK government bonds [↩]
2. Par is the face value of a bond. That is, the price the bond was issued at, which you get back when it matures and is redeemed. [↩]
3. That is, after inflation. [↩]

What is the cheapest stocks and shares ISA available? The investing world can be complicated, but this time we have a simple answer for you. Right now the cheapest stocks and shares ISA is the DIY option from InvestEngine.

^{Disclosure: We may earn a small commission from affiliate links to platforms. This doesn’t affect the price you pay. Your capital is at risk when you invest.}

InvestEngine is the lowest cost stocks and shares ISA on the market because right now it costs nothing.

Zip! Nada!

Now that’s my kind of price range!

Read on for more about InvestEngine’s share ISA.

Cheap stocks and shares ISA hack news! If you’re interested in our investment ISA hack then there’s good news: iWeb Share Dealing has a special offer on. It has waived its usual £100 account opening charge until 30 June 2024. So you can sign-up for free, and take advantage of its zero platform charge thereafter. More on this below.

Cheapest stocks and shares ISA: good to knows

InvestEngine’s ISA costs zero for annual fees, dealing charges, FX fees, entry/exit levies and most of the other multi-headed investment costs that snap at our wallets like a financially-incentivised Hydra. (It’s little known that the Ancient Greek polycephalic snake-beast was on a bonus scheme. Fifty drachma per hero slain.)

The only costs you will pay are the usual Total Expense Ratio / Ongoing Charge management fees that must be borne when investing in any fund, plus trading spreads. So far, so standard.

The platform’s downside is that its range of ETFs is more restricted than costlier platforms, and you can only trade at fixed times per day.

Frankly though, I think that’s a reasonable trade-off. Especially because you can easily create a good investment portfolio from the ETFs available.

Read our full InvestEngine review. We like it. Just make sure you choose the DIY ISA, not the managed one.

Our only concern is how long can the service remain free?

We’ve previously investigated how zero commission brokers make their money. In InvestEngine’s case, it’s mostly hoping you’ll opt for its paid managed offering.

Cheapest stocks and shares ISA: alternative

The cheapest stocks and shares ISA runner-up is Trading 212. It too charges a big, fat zero for platform fees and trading commission. However it does levy a FX fee of 0.15% on transactions that involve foreign currency. (InvestEngine does not).

This piece explains how you can avoid FX fees using ETFs.

Some Trading 212 users also report paying higher bid-offer spreads on their trades than may be the case on other platforms.

It’s very hard for us to know if they’re right, but no platform can afford to offer its services for free. They all have to make money somehow.

Cheap stocks and shares ISA hack

What if InvestEngine’s prices creep up, or you don’t like its limited pool of ETFs, or want an alternative because you’re concerned about the FSCS investor compensation limit of £85,000?

In that event let’s recap our cheap stocks and shares ISA hack. It still delivers tax shelter satisfaction for an exceptionally low cost.

Here’s how the hack works:

• You begin by drip-feeding into your stocks and shares ISA with the best-value percentage-fee broker on the market.
• Once your ISA is full you transfer it to the cheapest flat-fee broker.
• You don’t buy and sell your investments at the flat-fee broker. You only trade (for zero commission) on your percentage-fee platform.
• In the new tax year, you open a fresh stocks and shares ISA with the percentage-fee broker.
• Rinse and repeat.

You now enjoy a best-of-both worlds deal that takes advantage of the brokerage industry’s niche marketing strategies.

Percentage-fee platforms offer the best terms to small investors. They tend to rake it in once your account swells beyond £25,000 to £50,000. They’re relying on your inertia.

Flat-fee brokers offer good rates to large investors. They hope to make it up in trading fees. They’re relying on high rollers who treat their portfolios like a night at the casino.

You can arbitrage these cost models, provided you’re active in transferring your ISA and then near-comatose once you’ve parked it at your long-stay platform.

Cheap stocks and shares ISA hack in action

Vanguard Investor offers the cheapest percentage fee stocks and shares ISA.

It charges 0.15% on the value of your assets and zero for trading fees.1

Were you to drip-feed your ISA allowance in evenly (£1,666 every month), you’d pay approximately £16 in platform fees for the year.

Leave your assets with Vanguard forever though and it’d keep charging 0.15% until you hit its £375 cap – the point where your account has accumulated £250,000.

But you’re not going to hang around.

Instead, you transfer your ISA to the most convenient flat-fee platform for long-term stashing. There’s a few choices but the cheapest is X-O.co.uk when iWeb doesn’t have a special offer on.

X-O charges a quite reasonable £0 for platform fees.

Dealing commission is a much less competitive £5.95 a throw. But we’re not trading there so we plan to pay pretty much zero pounds to X-O.

Total cost of your stocks and shares ISA per year = £16. 

Not bad!

Just transfer your ISA from Vanguard when it’s full, or after you’ve paid in your last contribution during the current tax year.

Open a fresh stocks and shares ISA with Vanguard on new tax year day (6 April) while your old one is lodged with X-O, gratis.

Note that X-O doesn’t do funds. It does do ETFs though, so make sure your Vanguard portfolio only contains ETFs tradable at X-O before you transfer.

You don’t want to have to sell out of the market and then buy your portfolio again when it arrives at X-O.

Cheapest stocks and shares ISA comparisons

What are the cheapest stocks and shares ISA alternatives to X-O?

Next comes iWeb Share Dealing. It normally charges a one-off £100 to open an account. But your ISA platform fees are zero after that.

iWeb also charges £5 per trade, so its a little cheaper than X-O if it wasn’t for the signing-on fee. 

So it makes sense to pounce on iWeb’s current special offer: open a stocks and shares ISA (or a standard dealing account) and it will forget all about charging £100, so long as you are onboard by 30 June 2024.

There’s no apparent obligation to fund or trade in your new account. See the offer T&Cs. So even if you’ve opened a stocks and shares ISA elsewhere in the current tax year, you can still open an iWeb dealing account.

Once you’ve got your foot in the door, you can put the cheap stocks and shares ISA hack into action without having to pay £100.

Even if you’ve opened another type of ISA elsewhere this tax year (e.g. cash ISA or LISA), you can still activate a new stocks and shares ISA with iWeb.

Arguably, you can do so even if you’ve maxed out your annual ISA allowance, as iWeb don’t require you to fund your stocks and shares ISA with them.

But you can just as easily make this work with a dealing account. There’s no need to open a stocks and shares ISA if you don’t want to. (Remember, the hack entails transferring existing ISA holdings.)

If you miss the iWeb special offer then you could think about its account opening cost as £33.33 for three years and then nothing from year four on.

Any other options?

You’d expect to pay £36 a year for your investment ISA at Halifax Share Dealing.

Lloyds Share Dealing costs £40 for your ISA platform fee.

Trades cost extra at these brokers – but you do your buying and selling at Vanguard.

Sitting on a £20,000 investment ISA at Vanguard costs you £30 a year alone. Plus another £16 on top as you build up your current tax year’s ISA.

Still, the bottom line is that InvestEngine is the cheapest stocks and shares ISA. The Vanguard-X-O or iWeb combo places second in most scenarios if you make monthly trades.

The other downside with Vanguard is you’re restricted solely to its funds and ETFs. That’s okay though because it runs excellent, cost-competitive index trackers.

The other main compromise with X-O is its website is medieval (as is iWeb’s). Reviews on the likes of Trustpilot are distinctly average.

X-O and iWeb are bare bones offerings so don’t rock up expecting five-star customer service.

I’ve personally dealt with iWeb for many years and found it to be perfectly acceptable. Plenty of Monevator readers also get on fine with X-O.

Note: accounts held with Halifax / Bank Of Scotland, Lloyds Bank, and iWeb count as one for the purposes of the FSCS investment protection scheme.

Low-cost stocks and shares ISA: alternatives to Vanguard

You could replace the Vanguard leg of the hack with Dodl. That’s AJ Bell’s spin-off app-only brand.

Like Vanguard, Dodl charges 0.15% per annum in platform fees and nowt for trading.

However, your fees would be higher because Dodl charges a £12 minimum fee no matter how empty your account is.

It also features a restricted fund and ETF range, though it’s not Vanguard only.

Wombat is slightly cheaper again (0.1%, plus £12 acount minimum) but its ETF list is extremely limited.

Close Brothers is your next stop among the percentage-fee brokers. It charges a 0.25% platform fee and zero commission for funds. ETF trades are £9 a pop, with no mercy for regular investors.

If you hate the idea of filling in transfer forms then you can make the entire hack work at a slightly higher cost at Fidelity:

• Buy funds monthly for zero trading fees while racking up platform fees at 0.35% per annum.
• Once you hit the breakeven point, sell your funds and buy as few ETFs as possible to reconstitute your portfolio at £10 a trade.
• Fidelity caps ETF fees at £90 per year.

Using this scheme, there’s no need to worry about which year’s ISA you’re transferring. The entire dosey-doe happens within your Fidelity stocks and shares ISAs.

It works because Fidelity act as a percentage-fee/zero commission broker with funds, and a flat-fee broker with ETFs.

Check out our comparison of ETFs vs index funds.

Tidying up the loose ends

All the cheap stocks and shares ISA options laid out above handle ISA transfers free of charge. Though X-O levies an exit fee should you decide to leave. (iWeb does not).

You need to transfer your investments in specie (so they’re not sold to cash) to avoid paying dealing fees to your flat fee broker at the other end.

In Specie or re-registration transfers mean you don’t have to worry about being out of the market either.

Check your new broker offers the same funds and ETFs as your old one.

Invest in accumulation funds and ETFs from the beginning. This will save you paying to reinvest dividends at the flat-rate broker.

I’ve ignored rebalancing costs once you’re all parked up at your cheap platform. A small investor should be able to rebalance with new money. Anyone with an embarrassment of riches can set their rebalancing alarm to once every two or three years. That gives you just as good a chance of being up on the deal as any other rebalancing method.

Or you could invest everything in a Vanguard LifeStrategy fund if you’re not at X-O (which is ETF only). LifeStrategy is a multi-asset fund that takes care of rebalancing for you.

Either way, rest assured this manoeuvre does not contravene the stocks and shares ISA rules:

• You can have as many stocks and shares ISAs as you like, so long as you don’t put new money into more than one per tax year.
• Transferring old ISA money or assets does not use up your ISA allowance for the current tax year or break the one-type-of-ISA-a-tax-year rule. 
• So every tax year, you can open a new ISA at the percentage-fee broker, and ship last year’s ISA to the flat-free broker.
• You can transfer any amount of your previous years’ ISA’s value. You can transfer the whole lot into one ISA, or transfer a portion of it into several ISAs, or any other combo you desire.

For more on stocks and shares ISA transfers.

To calculate your cheapest platform option.

Our broker comparison table tracks the UK’s best platforms.

Cost shavings

If you truly want the cheapest stocks and shares ISA possible then you’ll need to factor in the cost of the low-cost index funds and ETFs available on any platform versus those available through Vanguard.

Paying slightly higher OCFs than necessary could overwhelm your platform fee / dealing fee savings. Be especially vigilant if you have a very large portfolio.

None of this takes into account the value of your time spent filling in forms. Although when you’re getting this anal then maybe that’s a net positive. (A person’s gotta have a hobby!)

Take it steady,

The Accumulator

1. You pay zero for trading ETFs as long as you accept the fixed daily trading times. [↩]

What caught my eye this week.

There are always a bunch of stories in The Financial Times worth including in Weekend Reading. Unlike most of the online media landscape – see the mini-special in the links below – the subscriber-funded FT goes from strength to strength.

Of course like anyone who believes their favourite outlet is unbiased, I guess the FT confirms all mine.

Free but regulated markets: good. A social contract and welfare state: fine too.

This stuff should be obvious by now, but apparently it’s not.

Brexit bad, obviously. But even better the FT isn’t signed up to the omertà code that apparently prevents others admitting the whole thing is a costly crock, whether out of fear of annoying Blimp-ish readers, politicians, proprietors – or all three.

A wolf with teeth

Here’s veteran economics commentator Martin Wolf on fine form this week on the bitter lessons of Brexit [search result]:

In sum, this supposed liberation has greatly curtailed the freedom of many millions of people on both sides.

Whose freedom has it increased? That of British politicians. They can act more freely than they could when bound by EU rules.

What have they done with this freedom? They have lied about (or, worse, failed to understand) what they agreed over the Northern Ireland Protocol. They have threatened to break international law. They even proposed eliminating thousands of pieces of legislation inherited from EU membership, regardless of the consequences.

These people have, in sum, destroyed the country’s reputation for good sense, moderation and decency. All this is a natural result of the classic populist blend of paranoia, ignorance, xenophobia, intolerance of opposition and hostility to constraining institutions.

Take that, Torygraph.

Whose history is it, anyway

But the main reason I love the FT – and I’m a paid-up subscriber – is its business and markets coverage. Not perfect, but at the least not reliably clueless like the competition.

In large part that’s down to its specialist journalists. A species that’s in danger of becoming extinct.

The world is moving to a model where we hear directly from sector experts for information and opinion, without any savvy writer as an intermediary. (Clue is in the word, eh?) Think X/Twitter, YouTube, blogs. This has pros and cons, but so did having a professional writer work the same beat for decades.

On that score I enjoyed John Plender’s lessons from a lifetime in investment yesterday [search result].

When I started learning about investing I read about Ross Goobey – the guru who transformed the Imperial Tobacco pension scheme – all the time. I wonder how many have heard of him now? Plender writers:

So great were the returns that Imperial enjoyed pension contribution holidays for years.

Other institutional investors followed suit by dropping gilts in favour of ordinary shares. Ross Goobey was credited with founding what came to be known as ‘the cult of the equity’.

Perhaps it doesn’t matter. The article’s point is partly that markets change. The globalisation of history and perspective has been part of all that.

Still it’s a bit of a shame that investing lore in the UK has become so American-ised.

Holy Taxman, Batman!

Finally, the FT has fun as only insiders can do, through its FT Alphaville blog-like section.

This week’s romps included a deep dive into HMRC vs action figures: the face off [search result] – a battle about what constitutes a human.

The language wouldn’t be out of place in an absurdist drama:

Are the people in Game of Thrones people?

It’s a question most of us probably don’t ever think about, but that might just come up if you’re a judge.

It quickly gets bonkers – “The character is a powerful mutant who is able to control magnetism through which he manipulates metal objects. This is a superpower which human beings do not have. The figure represents a non-human creature” – but I don’t want to overdo the quoting.

Enjoy!

Will we pay for it?

As per the mini-special in the links below, the media landscape is imploding.

Ads long ago ruined websites via the incentive of clickbait desperately stirred up to try and tempt crumbs of traffic away from social platforms. Google, Meta, and TikTok take most of the money anyway. People under 30 mostly watch video.

Again, does it matter? I guess we’ll soon find out.

I suspect it does, and even that there’s becoming almost a moral case for paying for at least one or two media outlets you’d like to see survive. I’m biased – we have our own dog in the game – but I’ve also put my money where my mouth is with the FT and others and I’m rarely disappointed.

Have a great weekend.

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