Quilter Cheviot has introduced a new short-term fixed income strategy for use in discretionary portfolios that invests based on the different tax treatment of returns from gilts.
In a statement on 31 August, the discretionary fund manager and private client adviser with offices in London and across the UK, as well as Jersey, Dublin and a DIFC branch in Dubai, said the strategy aims to provide a high return competitive with cash deposits for clients with a low risk profile by investing in carefully selected individual gilts with low coupons and short-term maturities.
The discretionary strategy is tailored for tax efficiency and therefore is relatively more attractive for higher or additional rate taxpayers.
Following a steep rise in interest rates, Quilter Cheviot said it believes there is an investment opportunity for higher rate and additional rate income taxpayers to secure a good after-tax return for relatively low risk, especially when compared to cash.
This situation has arisen because gilts issued when interest rates were close to zero typically carried a similarly low coupon. As interest rates have moved sharply higher the price of these gilts has fallen, increasing the total yield on offer.
Investor returns from gilt investments come from price appreciation and coupon payments and the different tax treatments of these sources of return can materially impact the after-tax return. As gilts are not subject to capital gains tax, the proportion of return from price appreciation is tax free, while income tax is levied on coupon payments. Therefore, it is more tax efficient to invest in low coupon gilts wherein the return is largely in the form of price appreciation.
This tax treatment also means gilts provide a more tax-efficient savings solution than cash at the bank. For example, an additional rate taxpayer holding a bond that matures in January 2025 with a coupon of 0.25%, will receive a total, after-tax, return of around 5% per year until maturity. It would require an equivalent cash interest rate of 9.08% from a bank to end up with the same total.
Upon maturity of the gilt, clients can either reinvest into the short-term bond strategy, move to another discretionary strategy or withdraw their money.
The standard management fee for this service will be 0.25% per annum up to £2,000,000 invested. Amounts above £2,000,000 will face a tiered fee structure, the first £2,000,000 at 0.25% and amounts in excess of this at 0.20%. The minimum investment amount is £250,000.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: "Recent developments have provided investors with the potential to secure a good return for relatively low risk. By being active and very selective with your gilt exposure, you can take advantage of the recent fall in bond prices in a very tax-efficient way.
"With cash at the bank now seeming to provide an alternative for many low-risk clients, although after inflation returns are still historically poor, it is important that investors and advisers do not simply consider it as the only option for their money in challenging markets.
"As more gilts get issued at today's yields, this is likely to be a fairly limited opportunity. However, this new strategy we have launched is one that gives clients a greater degree of flexibility as its discretionary nature means they can rotate into riskier assets should their circumstances change, or markets become a little less uncertain.
"Unlike with fixed-term cash deposits, they do not need to lock their money away to access the best rates, and as the data shows, this strategy can offer a far greater after-tax return than a traditional savings account for higher and additional rate taxpayers."
