A growing number of UK investors are opting for government bonds, with Hargreaves Lansdown reporting a 38% year-on-year increase in users holding individual gilts. This shift occurs as some long-duration instruments, such as the 30-year gilt, are yielding 5.94%.
However, new government bond issuance has reportedly avoided such high rates. Instead, investors would need to purchase gilts issued previously at lower coupons, which are now trading at a discount to their par value. A portion of the return from these bonds would come as a capital gain upon redemption.
While coupon payments on gilts are subject to tax outside an ISA, gilts are exempt from capital gains tax (CGT). This makes short-dated bonds trading at a significant discount to par attractive. For example, a 0.125% coupon bond trading at £94.78 and maturing in January 2028 offers a mostly tax-free yield to maturity of 4.2%.