Fears that the Labour government would increase the capital gains rate on shares during the budget next week has led to a rush of retail investors into the government bonds market.
The investment platform AJ Bell has reported a 71 percent increase in the amount of gilts bought in September compared to August. This represents a 177% increase on September of last year.
Interactive Investor, an rival broker, reported that between August and September, the company’s monthly growth was 30 percent.
As speculation grows, Rachel Reeves could raise the capital gains tax this Wednesday. While interest or coupons paid on gilts is taxed, price movements are exempt from capital gains taxes.
Sam Benstead of Interactive Investor said: “The gilts that are most popular in 2024 will all mature very soon, and they have low coupons. This means that they trade at a discounted price to their £100 redemption values. Their return is mainly derived from capital appreciation rather than coupons.
Capital gains tax is currently levied if you make more than £3,000 on the sale of an asset. However, money in a pension fund or Isa account is exempt. Around 350,000 private investors pay the tax each year.
Capital gains on gilts that are not held in these wrappers, but outside of them, are also exempted from CGT. The majority of the gilt yield is derived from gains if held until maturity, rather than fixed interest payments. Bonds with small coupons are particularly attractive to investors who pay a higher rate of tax. Although the payments are taxed, the remainder is regarded as a capital profit.
Reeves is expected to increase CGT for the sale of some assets and shares, but not gilts. Capital gains on the sale of shares could increase by several percentages points. Currently, capital gains are taxed at 20 percent.
Some have speculated that Reeves may also eliminate some capital gains reliefs from the current regime to increase revenue potential as she strives to stabilize public finances and prevent a return of austerity.
In the last year, gilts have become more popular due to their high returns and tax benefits. At AJ Bell, for example the number of gilts bought on the platform has doubled over the last year.
On Friday, two-year gilts returned 4.13 percent and ten year gilts returned 4.21 percent. This is generally considered to be attractive when compared to the highest-quality government bonds on the market – US treasuries. On Friday, US treasuries with a two-year maturity yielded 4,05 percent and those with ten years yielded 4.2 percent.
In recent weeks the gilt market has become jittery as investors attempt to anticipate possible fiscal changes ahead of the budget. Gilt yields increased several basis points during the last week, as Reeves announced that she will introduce a “investment” rule which could release more than £50bn in borrowing capacity. Investors are more likely to view a government’s bond as riskier if the yield is higher.
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