Reduce tax on savings by parking cash in gilts [Members]
For MAVENS and MOGULS by The Accumulator
on November 6, 2024
Are you paying tax on your savings interest? Would you like to pay less tax? Well, it turns out you can, by stashing your cash in gilts. It’s a legal and safe option that I’ve personally overlooked until now.
The trick is to move your money out of savings accounts and into certain individual gilts:
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I have some of this, indeed as a result of Jam’s comment. One thing that’s not clear to me, because I haven’t gone through it, is do I need to declare this trade on the self-assessment form? Or is there a special gilt section I haven’t seen, because I haven’t had to do it yet?
I don’t really turn much over, so I declare all GIA trades on sell. But all things being equal this would probably pick up a CGT liability where there is none, sort of missing the point. Somebody who has gone through this might be able to help?
Thanks @TA, it’s a good arbitrage, the market has reduced it a bit, low coupon gilt yields are below high coupon equivalents now. Still plenty of juice left though as your numbers clearly show particularly for higher tax brackets.
Accrued interest is a slightly thorny point to be aware of in terms of tax reporting. If you sell before maturity on a day other than an ex-coupon date and you’re over your tax free interest allowance you’re going to have to split out the accrued interest from the dirty price and declare it as income. Equally you could claim any accrued interest paid on purchase as a loss but the amounts will of course be tiny with a low coupon gilt.
Would it be fair to TL;DR this as ‘safely ignore if you’re a basic rate tax payer’?
You’d either have to be sitting on a substantial pile of cash, say > 100k or just like the technical challenge of doing it as a basic rate tax payer as the gain is approx 10bp.
I can see HRT and above is a bit more compelling.
@Rhino > as the gain is approx 10bp.
not sure I catch the drift, f’rinstance I have 50k on a 3month deposit to come out around new ISA time, and it was on deposit for the last 6 months. Around 5% p.a. say it were a year that’s £2500, of which £500 is lost to tax relatively. This is a 1% hit. I have already consumed the 500 BRT savings allowance elsewhere. I’m not sure I’d open an iweb GIA to save £500, but since I have it already, may as well use it. What am I missing?
Thanks for the acknowledgement.
@ermine. I am not a tax expert, but since sales (and the redemption at maturity) of gilts held directly is free of CGT, it is a total waste of time to declare them to HMRC, since they would disregard them. (Not true of gilt funds which are subject to CGT).
The interest you receive on the gilts is taxable interest. I just declare these each year, in the same way I declare interest from banks or building societies.
@Rhino, I manage the risk free portion of my portfolio so that my interest from banks, building socities and gilts is less than the £1000 allowance, so I effectively pay 0% tax on it. As a basic rate taxpayer and someone who would otherwise pay only 20% tax, I think it is a tax saving still worth having. Sure, it would be an even better saving if I was a higher rate tax payer, but it is not to be sniffed at.
Ok, I was just looking at the gross interest rate equivalent for the 20% column in that sheet and noting not that different to the better rates available on the high street for cash savings, that was the the 10bp difference comment.
Another benefit of low-coupon gilts, which I have been exploiting, occurs if you are in danger of reaching the HRT threshold. Recent high interest rates on cash savings (as well as inflation-linked increases to DB and state pensions) have put me much closer to this threshold than I expected before 2022. Switching some of my cash to low-coupon gilts has helped me keep below the threshold.
@ermine (1) I don’t think you have to declare trades (presumably only sales and hence potential gains would be the issue here) on your tax return, but AIUI gilt interest goes on the ‘Additional Information’ section of the return. Don’t forget to deduct the accrued interest on purchase. I have not held mine long enough yet to have explored this in detail.
I’m an old git who’s a higher-rate tax payer in Scotland – please put away those tiny violins!
At first glance, TN28 looks attractive as a means of reducing tax and locking into a good return for over 3 years. The main concern I have is the need to complete a self-assessment form for years to come when my intellectual faculties may have deterioriated still further! I presume that I’d have to declare the accrual loss on the first SAF submitted after the purchase.
@Grump Old Paul, suppose you bought TN28 with, say, £10 accrued interest. If it then paid out a interest of £10o at the next payment dividend date then you would only be taxed on £90 of interest.
As DavidV #7 says you deduct the accrued interest and the declare it in the ‘additional info’ section of your tax return.
I actually forgot to do the dection the first time I ever bought gilts, I didn’t understand them quite as well back then, so I overpaid a few pounds in tax by not doing the deduction. I did declare it all to HMRC, but it seems the tax clerks working for HMRC didn’t know to deduct it either!