Last reviewed: 11 May 2026. Gilts are UK government bonds. They pay a fixed coupon twice a year and return the face value at maturity. After the 2022 to 2023 yield repricing, UK retail interest in gilts climbed sharply, helped by their unusually favourable tax treatment in a General Investment Account. This guide explains how UK gilts work, how to buy them, why short-dated low-coupon gilts have become a tax-efficient cash alternative, the role of index-linked gilts, where corporate bonds fit, and the main risks.
TL;DR
- UK gilts are debt securities issued by HM Treasury, backed by the UK government's full faith and credit.
- Direct holdings of conventional gilts are exempt from UK Capital Gains Tax, regardless of how large the gain. This is unusual and valuable.
- Coupon income is taxable as savings income, but for short-dated low-coupon gilts bought below par, the coupon is small and most of the return comes as tax-free gain.
- Index-linked gilts pay a coupon and principal linked to UK Retail Price Index, useful for inflation protection.
- Buy direct via a broker, through gilt funds and ETFs, or (limited range) through NS&I.
- The main risks are interest rate risk (prices fall when yields rise) and inflation risk for conventional gilts.
What is a gilt?
A gilt is a UK government bond. When you buy a gilt, you lend money to HM Treasury in exchange for fixed coupon payments (usually twice a year) and the return of the face value (par, conventionally £100) when the gilt matures. The market price moves up and down with interest rate expectations between issuance and maturity; the closer the gilt is to maturity, the less price-sensitive it is to rate moves.
Conventional gilts have a fixed coupon. Index-linked gilts have a coupon and principal linked to the Retail Price Index (RPI), so they offer some inflation protection. Both types are tradable on the London Stock Exchange and issued through Debt Management Office auctions. Gilts are also bought and sold by overseas investors, central banks, pension funds, and life insurers, making the gilt market one of the deepest sovereign bond markets in the world.
Why gilts are tax-efficient
UK Capital Gains Tax does not apply to direct holdings of gilts. If you buy a low-coupon short-dated gilt below par and hold it to maturity, almost all the total return comes as capital gain, which is tax-free for individuals. Only the coupon is taxable as savings income, and savings income falls inside the personal savings allowance for many taxpayers (£1,000 for basic rate, £500 for higher rate, nil for additional rate as of the 2025-26 tax year).
This makes short-dated low-coupon gilts particularly attractive in a General Investment Account once the ISA allowance is used. Inside an ISA or SIPP the wrapper already shelters everything, so the gilt-specific exemption matters less. The favourable tax treatment is the reason short-dated low-coupon gilts trade at noticeably lower yields than equivalent-maturity gilts with higher coupons.
Worked example for a higher-rate taxpayer
Consider a higher-rate taxpayer with a £20,000 GIA. They could buy:
- A short-dated gilt with a 0.25% coupon, currently trading around £92, maturing in 2031 at £100. Yield to maturity around 3.9%. Most of the return is tax-free capital gain.
- An easy-access savings account paying 4.0% gross, subject to 40% income tax above the £500 personal savings allowance.
The gilt's after-tax return for the higher-rate taxpayer is approximately 3.8%. The savings account's after-tax return is approximately 2.4% on the portion above the personal savings allowance. The gilt wins materially.
How to buy gilts
| Route | Suits | Costs | Notes |
|---|---|---|---|
| Direct via investment platform | Investors wanting specific maturities | £5 to £15 per trade plus 0% to 0.45% platform fee | Buy individual gilts by ISIN or TIDM (the LSE ticker). Settlement T+1. Most major platforms support gilt trading; a few do not. |
| Gilt ETFs | Diversified exposure | 0.05% to 0.15% OCF | Tracks a basket; no specific maturity date. Subject to CGT in a GIA (unlike direct gilts). |
| Gilt funds (OEICs) | Hands-off investors | 0.10% to 0.50% OCF | Daily-priced, no spread. Subject to CGT in a GIA. |
| NS&I | Conservative savers | Free | Limited product range; not strictly gilts but UK government-backed. Includes Premium Bonds and fixed-term Guaranteed Bonds. |
The most common retail mistake is to buy a gilt ETF in a GIA expecting tax-free treatment. The ETF is not a direct gilt holding; CGT applies normally. To get the CGT exemption you must hold gilts directly by ISIN.
Reading a gilt name
A gilt is described by coupon, maturity, and (sometimes) a colloquial name. "0.25% Treasury Gilt 2031" pays a 0.25% annual coupon on the face value and matures in 2031. The "yield to maturity" is the total annualised return if you buy now and hold to maturity, factoring in the price you pay (which may be below or above par). The Debt Management Office publishes daily yields and detailed metrics for every outstanding gilt.
The coupon is paid semi-annually in two equal instalments. Accrued interest is paid by the buyer and received by the seller on each trade, settled cleanly through the broker. The "clean price" is the gilt price excluding accrued interest; the "dirty price" includes it. Most platforms quote clean prices.
How yield, price, and interest rates relate
Gilt prices move inversely to yields. When the Bank of England's expected rate path falls, gilt prices rise (yields fall). When the expected path rises, gilt prices fall. The longer the maturity, the larger the price move for a given yield change: a 1 percentage point rise in 10-year yields knocks roughly 8% off the price of a 10-year gilt and roughly 15% off a 20-year gilt. This is duration risk.
For a buy-and-hold-to-maturity investor, mid-life price moves do not matter: you receive your coupons and your £100 at maturity regardless. For an investor who may need to sell early, duration risk is a real consideration.
Corporate bonds in context
Corporate bonds pay a higher coupon than equivalent-maturity gilts to compensate for default risk. UK investment-grade corporate bonds typically yield 0.5 to 1.5 percentage points above gilts in normal conditions. High-yield (sub-investment-grade) bonds yield 3 to 6 percentage points above gilts but carry materially higher default risk. Unlike gilts, corporate bonds are subject to Capital Gains Tax in a General Investment Account, so the tax-efficiency advantage of direct gilts does not extend to corporate bond holdings outside an ISA or SIPP.
Most retail investors access corporate bond exposure through corporate bond funds and ETFs rather than direct holdings, because the minimum trade sizes for direct corporate bonds are usually £50,000 or £100,000.
Index-linked gilts and inflation
Index-linked gilts ("linkers") pay coupons that adjust with RPI inflation, and their principal at maturity is also RPI-adjusted. They are widely used by defined-benefit pension funds for liability-matching. For retail investors, linkers protect purchasing power if inflation surprises to the upside, but pay a lower headline (real) yield than conventional gilts because the inflation protection is priced in.
RPI is being aligned with CPIH from February 2030 onwards under the planned reform announced by HM Treasury and the UK Statistics Authority. This will lower future inflation accruals on existing linkers compared with the historical RPI series. The market has already priced this in over recent years through the relative pricing of pre-2030 vs post-2030 maturity linkers.
Strategies for retail investors
Gilt ladder
A gilt ladder is a portfolio of gilts maturing in successive years (for example 2026, 2027, 2028, 2029, 2030). As each gilt matures, the proceeds are reinvested at the long end of the ladder. This averages out interest rate risk and provides steady reinvestment opportunity. Ladders are particularly useful for retired investors needing predictable annual income and capital availability.
Tax-efficient cash substitute
A higher-rate or additional-rate taxpayer with cash sitting outside an ISA can substitute short-dated low-coupon gilts (1 to 3 year maturity) for some or all of that cash. The tax advantage on the gain typically delivers a meaningfully higher after-tax return than an easy-access savings account.
Duration matching
If you have a known future liability (university fees in 5 years, a property purchase in 7 years), buying a gilt that matures around the same time locks in a known return. This is particularly valuable for cash earmarked for a specific date.
Risks
- Interest rate risk: Prices fall when yields rise. Longer maturities are more sensitive.
- Inflation risk: Conventional gilts pay a fixed coupon, so their real value falls if inflation rises persistently.
- Reinvestment risk: If yields fall before your gilt matures, you may reinvest coupons at a lower rate.
- Liquidity risk: Most benchmark gilts are very liquid. Some smaller off-the-run gilts have wider bid-offer spreads.
- Sovereign risk: Negligible for UK gilts at current investment grade. Reflected in CDS prices and credit rating actions. The UK has never defaulted on a gilt.
- Concentration risk: A portfolio of only gilts is concentrated in one sovereign and one currency. Most investors hold gilts as part of a diversified portfolio.
Frequently Asked Questions
Are gilts safer than corporate bonds?
Yes, in default-risk terms. UK gilts are backed by HM Treasury. Corporate bonds carry the credit risk of the issuing company.
Do I have to hold a gilt to maturity?
No. Gilts trade on the London Stock Exchange and can be sold at market price at any time. The price you receive reflects current yields, so you can gain or lose against the purchase price.
Are gilts free of all UK tax?
The capital gain on a direct gilt holding is free of CGT. The coupon income is taxable as savings income (subject to the personal savings allowance for many taxpayers). Inside an ISA or SIPP, both are tax-sheltered.
What is a "ladder" of gilts?
A gilt ladder is a portfolio of gilts maturing in successive years. As each gilt matures, the proceeds are reinvested at the long end of the ladder. This averages out interest rate risk and provides steady reinvestment opportunity.
Can I buy gilts in an ISA?
Yes. Direct gilts can be held in a stocks and shares ISA or SIPP at most platforms. The ISA wrapper shelters both gain and income from tax.
What's the minimum to buy a gilt?
Most platforms allow gilt trades from £100 to £1,000 minimum. The market quotes in £100 nominal units, so practical minimums depend on the broker's commission structure and any quoted minimum size.
How is interest paid?
The coupon is paid semi-annually directly into your platform cash account. You can reinvest, withdraw, or leave it in cash.
Disclaimer
This page is for general information only and is not financial or tax advice. The value of bonds can fall as well as rise; you can lose money. Tax treatment depends on individual circumstances and may change. Always seek regulated advice if you are unsure.
