Gilts Explained: Investing in UK Government Bonds

A gilt is a bond issued by HM Treasury. The name comes from the original "gilt-edged" certificates, reflecting the high confidence that the UK government will repay. Each conventional gilt has three defining features: a face value (usually £100), a fixed coupon (the annual interest, paid in two instalments), and a maturity date when the £100 face value is repaid.

You do not have to hold a gilt from issue to maturity. Gilts are traded on the market, so their price moves up and down before maturity, mainly in response to interest rates. When market interest rates rise, the price of existing gilts tends to fall, because their fixed coupons look less attractive compared with newly issued bonds; when rates fall, gilt prices tend to rise. If you hold a gilt to maturity, however, you receive the £100 face value regardless of what the price did along the way (assuming the government repays, which is considered very likely).

There are also index-linked gilts, where the coupon and the final repayment rise in line with inflation, but the explanation below focuses on conventional gilts.

Gilts are taxed in two separate ways, and the split matters more for higher and additional rate taxpayers than it does for almost any other UK investment.

Capital gains are exempt. All disposals of gilt-edged securities have been exempt from capital gains tax since 2 July 1986, under section 115 of the Taxation of Chargeable Gains Act 1992. The exemption applies whether you sell before maturity or hold to redemption, and there is no limit on it. That is unusual: gains on most other investments become chargeable once they exceed the annual exempt amount of £3,000 for 2026/27, taxed at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers. Our article on capital gains tax explained sets out how that works for other assets.

Coupon interest is taxable. The twice-yearly coupon is savings income, taxed at 20%, 40% or 45% for 2026/27 depending on your band. It is paid gross, so tax is collected through Self Assessment or your tax code rather than deducted at source. The Personal Savings Allowance shelters the first £1,000 of savings income for basic rate taxpayers and £500 for higher rate taxpayers; additional rate taxpayers receive no allowance. Our article on the personal savings allowance covers the detail.

Note that savings income tax rates are due to rise to 22%, 42% and 47% from April 2027, which affects the coupon but not the capital gains exemption.

Because the coupon is taxed and the capital gain is not, two gilts maturing on the same date can produce very different after-tax returns depending on how their return is split between the two.

A gilt with a low coupon trading well below its £100 redemption value delivers most of its return as a capital gain on redemption — which is exempt. A gilt with a high coupon trading near or above par delivers most of its return as taxable interest. For an additional rate taxpayer with no Personal Savings Allowance, that difference can be substantial on the same gross redemption yield.

This is why low-coupon gilts are frequently held directly rather than through a fund by people with income above the higher rate threshold, and why the comparison is worth running properly rather than by headline yield. Our article on tax efficient investing covers where this sits alongside other allowances.

Two exceptions matter:

Gilt strips. A gilt strip separates the interest payments from the capital repayment and trades them separately. For individuals, strips are treated as deeply discounted securities and taxed as income rather than benefiting from the capital gains exemption.

Accrued interest on transfers. Where a gilt is bought or sold between coupon dates, the Accrued Income Scheme can attribute part of the price to interest and tax it as income. HMRC's helpsheet HS343 sets out how the scheme operates. This is most likely to affect people trading gilts actively rather than holding to maturity.

Held inside a stocks and shares ISA or a pension, gilt coupons are free of income tax, which removes the only taxable element. The capital gains exemption applies either way, so the wrapper adds nothing on that side.

For a higher or additional rate taxpayer with limited allowance remaining, this creates a genuine planning question: the ISA allowance of £20,000 for 2026/27 may be better spent on assets whose gains would otherwise be taxable, leaving low-coupon gilts held directly where their exemption already applies. Our article on stocks and shares ISAs covers the wrapper itself.

Gilts are lower-risk than shares, but they are not risk-free. The main risks are interest rate risk and inflation risk. If you need to sell before maturity and interest rates have risen since you bought, the price may have fallen and you could get back less than you paid. Inflation can erode the real value of a conventional gilt's fixed payments over time, because the coupon and the £100 repayment do not rise with prices. There is also a small element of credit risk — the possibility the government does not repay — but for UK gilts this is generally considered very low.

Holding a gilt to maturity removes much of the price uncertainty, because you receive the face value at the end, but your money is committed for that period and the real (after-inflation) return is not guaranteed.

Gilts are often used to add stability and predictable income, balancing more volatile assets such as shares. How much, if any, to hold depends on your goals, your time horizon and how much risk you are comfortable taking — the same questions that sit behind asset allocation generally.

It is also worth remembering that if you hold investments within an ISA or pension, gains and income are already sheltered from tax, so the gilt capital gains tax exemption is less of a distinguishing feature there. The exemption is most valuable on holdings outside a tax wrapper. Deciding what belongs inside a wrapper and what sits outside it is part of tax-efficient investing.