10 February 2024
UK Government debt offers higher-rate taxpayers more than 1.5x inflation pre-tax
The returns available on gilts have crept up again as inflation took a surprise rise in December and the chancellor has hinted at potential tax giveaways in March’s Budget, according to RBC Brewin Dolphin.
Figures from the wealth manager show that the gross (pre-tax) yields on a range of gilts expiring between January 2025 and March 2028 have ticked up again, offering the equivalent of more than 6% to higher-rate taxpayers. The majority of gilts redeeming over that period provide a yield roughly in line with or over the last inflation reading of 4%¹.
A gilt expiring at the end of January 2025 pays a coupon – the interest rate on the bond – of just 0.25%. However, each £100 of debt can be bought for £95.84, and investors who hold it until it expires would receive the full issue price with no tax to pay on the capital uplift.
For a higher rate taxpayer, the tax-free capital gain combined with the coupon mean the gross annual yield is equivalent to 7.55% and 4.53% after tax. The same gilt yielded 7.23% before tax for a higher-rate taxpayer in December.
The net (post-tax) yield on the same gilt is even more attractive for basic-rate taxpayers, at 4.58%, and it would provide 4.64% for non-taxpayers.
| Net yield at tax rate | ||||||||
|---|---|---|---|---|---|---|---|---|
| Bond | Duration (Y) | Price | 0% | 20% | 40% | 45% | ||
| Treasury | 0.25% | 31/01/2025 | 0.95 | £95.84 | 4.64% | 4.58% | 4.53% | 4.52% |
| Treasury | 0.125% | 30/01/2026 | 1.93 | £92.46 | 4.15% | 4.12% | 4.09% | 4.09% |
| Treasury | 0.375% | 22/10/2026 | 2.63 | £90.71 | 4.04% | 3.97% | 3.89% | 3.87% |
| Treasury | 0.125% | 31/03/2028 | 3.89 | £86.21 | 3.90% | 3.87% | 3.84% | 3.84% |
| Gross equivalent yield at tax rate² | ||||||||
|---|---|---|---|---|---|---|---|---|
| Bond | Duration (Y) | Price | 0% | 20% | 40% | 45% | ||
| Treasury | 0.25% | 31/01/2025 | 0.95 | £95.84 | 4.64% | 5.73% | 7.55% | 8.22% |
| Treasury | 0.125% | 30/01/2026 | 1.93 | £92.46 | 4.15% | 5.15% | 6.82% | 7.43% |
| Treasury | 0.375% | 22/10/2026 | 2.63 | £90.71 | 4.04% | 4.96% | 6.48% | 7.03% |
| Treasury | 0.125% | 31/03/2028 | 3.89 | £86.21 | 3.90% | 4.84% | 6.41% | 6.98% |
Rob Burgeman, senior investment manager at RBC Brewin Dolphin, said: “There has been quite a shift in gilt terms over the last month, as bond markets have responded to the shock rise in inflation announced in January and the talk of tax cuts in March’s Budget. Rising gilt yields might be good news for investors, but they also suggest that bond investors expect interest rates to stay higher for longer – and, with that, fixed-term mortgages will likely do the same. We’ve already seen one bank raise its mortgage rates this year.
“Using the government’s preferred measure of inflation, the consumer price index (CPI), which is currently 4.0%, the returns available on gilts look attractive – especially with inflation expected to fall over the coming months. Indeed, using economic forecasts from Bloomberg, the rate of inflation is expected to fall to 2.8% later in 2024 and 2.1% in 2025, making the ‘after inflation’ returns available at the moment positive in real terms.
“So, short-term gilts are still a very attractive option for tax-efficient returns, despite the big changes of the last year. They undoubtedly have a role to play as a cash-like alternative in a risk-adjusted, balanced portfolio – a professional adviser can put together a basket of investments to include gilts and guide you through the type of returns you could reasonably expect.”
Disclaimers
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. This information is aimed at individual taxpayers only; the tax treatment for corporate taxpayers is different. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: GB 690 8994 69.
– ENDS –
Rob Burgeman and his fellow investment managers at RBC Brewin Dolphin put together bespoke investment portfolios for clients based on their long-term objectives and their attitude to risk. The portfolios will have a mixture of hand-picked holdings in them including third party funds and individual stocks that are researched and recommended by RBC Brewin Dolphin’s in-house research team.
PRESS INFORMATION
For further information, please contact:
Peter McFarlane peter.mcfarlane@framecreates.co.uk / 07412 739 093
Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343
NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £51.8* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 31st October 2023.
The value of investments can fall and you may get back less than you invested.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: GB 690 8994 69.
About RBC
Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 94,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our more than 17 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.
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- Source: https://www.bankofengland.co.uk/monetary-policy/inflation
- The gross equivalent yield is the yield a taxable bond would need to earn to match the yield on a comparable tax-exempt bond.