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Reduce tax on savings by parking cash in gilts [Members]
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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!
Regarding tax, this is reported in the additional information pages, “Interest from gilt-edged and other UK securities, deeply discounted securities and accrued income profits”. It does not go into the untaxed bank and building society interest box.
There is no need to report or break down the interest by trade or security, just add it all up and report the total.
Accrued interest paid on purchase gets deducted from the next coupon payment or from the accrued interest received on disposal. This can be in the following year. For example if you buy a gilt in March 2025 and the coupon (or disposal) happens in June 2025, you report in the 2025/26 tax year and deduct the accrued paid in March from the coupon you receive in June.
Disposals of gilts do not need to be reported at all as no CGT arises, but you must keep track of the accrued interest you receive on disposal.
I would guess that if the total of gilt interest, bank interest, etc. was below your savings allowance there would be no need to do self assessment or to report the interest.
None of this is difficult, but you must keep proper records and don’t rely on broker annual statements as they are invariably wrong on the handling of bond interest.
Excellent article, thanks, and food for thought.
Is it fair to also throw Premium Bonds into the mix for comparison, for those with maybe £20-50k of unsheltered savings, given that the “winnings” are tax-free? I’d always considered them a gimmick – and in some ways they are – but articles and/or comments on this site made me take a closer look. Again, the higher your tax rate, the more sense they make. I don’t think they’d quite match the gilt strategy in this article (assuming average luck), but they’re a fair bit simpler. They’re variable rate, of course, so don’t have the benefit of a guaranteed rate, even before the vagaries of luck.
The Money Saving Expert article on Premium Bonds is a must for anyone considering them, and explains why they’re not recommended for low savings amounts.
@ Invariant – Yes, I agree Premium Bonds are the other go-to for a comparison like this. That MSE article is excellent. I didn’t look at Premium Bonds for this article, but IIRC Jam has, so he might well have a view.
Just quickly eyeballing MSE’s “average luck” take on the prize rate, seems like PBs are less competitive than gilts. The lottery effect means actual outcomes will be pretty variable but, on the other hand, probably less hassle than learning about gilts.
Personally, I’ve never so much as won £10 in a raffle so I shy away from prize draws 🙂
@Invariant, well over a year ago know, after I got my head around gilts, I moved my £50k holding in premium bonds into gilts. I had held the full amount of premium bonds for a long time and according to the MSE website my return was almost exactly what was expected for a person with average luck.
I can’t remember the figures now, but when I did it, given the prevailing rate on gilts and on PB’s, I was in for a definite return of hundreds of pounds extra assuming my average returns continued. Certainly it was enough to make the move worthwhile. It was just an exercise in optimising that part of my portfolio.
If things have changed when the gilts mature, I might move them back.
I do miss the vanishingly small chance of winning a million with the premium bonds. So whenever there is a EuroMillions draw that guarantees to make 10 UK millionaires, as there was last month then I buy a ticket, funded from the extra return from the gilts. Fortunately for me, I have sufficient self discipline to not waste all the gilt ‘profits’ on the Euromillions.
Thanks for the very clear article. If I were to buy a nominal single (non IL) gilt inside my ISA I understand that there is no point in looking for low coupon rates as CGT does not apply in the wrapper. Presently looking at TR25 (5% 7/3/25).
Does not being IL affect the discussions on clean/dirty pricing and will the bond immediately show a loss when bought (currrently priced about 100.1)? T he whole process seems off-puttingly arcane and designed to confuse! – but I’m determined to get there. Trying out one gilt may give me confidence about ladders…
PS – Apologies, I know it is the lack of income tax in the ISA that means you don’t have to look for low coupons
@snowcat #14.
If buying inside an ISA, there is no pint going for the really low yielding gilts, as the lack of income tax inside the ISA means there is no tax advantage.
If you look at https://reports.tradeweb.com/closing-prices/gilts/
the yield column gives you the ‘gross redemption yield’, which is the is more or less the same as the Annual Equivalent Rate you are used to a savings account. (The GRY does assume that the interest rate remains constant and hence the dividends are re-invested at the same rate as the yield.)
So just go for the ones with the highest GRY that meet your need for a particular investment period.
TR25 costing £100.1 approx for £100 of nominal, means you will pay out £100.1 to get £100 back at redemption, which sounds like it sucks, but you are getting a very high yield (tax free in your ISA) to compensate for that very slight capital loss. Overall you will get the GRY yield.
Will it immediately show a loss? Remember you bought it in the market at a fair market price. The price can go up or down from moment to moment. If you were to sell it straight away, assuming prices haven’t moved, you should only incur the loss of the bid-offer spread, which are very small on gilts.
I hear you about this all being arcane, but the really funny thing about it all is that the gilt market is the most open and transparent market there is. You know what yields and redemption prices of the gilts will be and can therefore work out (easily if you are a whizz with Excel, or use one of the websites like Tradeweb) to figure out exactly what you will get if you hold them to maturity. The reality is this just shows how hard it is to value equities, where none of this is known.
@Jam Thanks very much for that which confirms my thoughts. I have gone ahead with TR25 inside my ISA. It did immediately show a loss of around1% but that appears to be due to paying for interest accrued in the period since the last coupon, so I guess I should get that back at the next.
The dictionary definition of arcane is ‘known or understood only by a few’ and I still believe that’s the case here!