UK Bonds and Gilts for Individual Investors

What gilts are and how they are issued

A UK gilt is a sterling-denominated bond issued by HM Treasury under the National Loans Act 1968. The Debt Management Office (DMO) runs the issuance programme, conducting auctions of new gilts approximately weekly during the financial year. The DMO publishes the gilt issuance calendar at dmo.gov.uk along with full prospectuses for each line. Gilts are the lowest-credit-risk sterling fixed-income instrument available; the UK government has not defaulted on its sterling debt in the modern era. Credit rating agencies typically rate UK gilts in the AA range (Moody's Aa3 to Fitch AA-, with periodic changes reflecting fiscal and political developments).

Gilts come in several forms. Conventional gilts pay a fixed semi-annual coupon based on the stated nominal rate and return par at maturity. Index-linked gilts have their principal and coupons linked to the Retail Prices Index (RPI), providing inflation protection. Treasury bills are short-dated instruments with maturities up to one year, issued at a discount to face value. Green Gilts, introduced in September 2021, fund specific environmentally beneficial expenditure under the UK Government Green Financing Framework.

The gilt market is the largest sterling fixed-income market by capitalisation. The DMO and the Bank of England publish detailed statistics on outstanding stock, daily turnover, and ownership distribution. International investors hold approximately 30 percent of the outstanding gilt stock; UK pension funds and insurance companies hold a further 30 to 35 percent; the Bank of England (through quantitative easing operations) held a substantial portion which has been gradually reduced through quantitative tightening from 2022 onwards.

New gilt auctions are open to the DMO's Gilt-edged Market Makers (GEMMs), with retail access via the DMO Approved Group of Investors scheme administered by Computershare. Retail investors can purchase newly issued gilts at auction at par or buy existing gilts in the secondary market through brokers and major platforms.

How a bond works mechanically

A bond is a contract under which the issuer agrees to pay specified coupon payments to the holder on specified dates and to return the principal (face value) at maturity. The bond is sold at issue at par (face value) or close to it, with subsequent secondary-market prices fluctuating as market interest rates change.

Bond prices and yields move inversely. When market interest rates rise, the present value of the bond's fixed future cash flows falls; the bond's market price falls until its yield equals the prevailing market rate. When market interest rates fall, the bond's market price rises. The magnitude of the price movement depends on the bond's duration: longer-dated bonds with longer cash flow profiles are more sensitive to interest rate changes than shorter-dated bonds.

The yield to maturity (YTM) is the total return an investor receives if the bond is held to maturity at the current price, assuming all coupons are reinvested at the same yield. YTM is the standard benchmark for comparing bonds with different coupons and maturities. Running yield (annual coupon divided by current price) is a simpler measure that captures only the current income return, not the capital gain or loss at maturity.

Convexity measures how the relationship between price and yield curves: longer-dated bonds typically have higher convexity, meaning their price gains in falling yields exceed their price losses in rising yields by a small amount. Convexity is a second-order effect on top of duration.

Tax on gilts: the CGT exemption

The capital gains tax treatment of gilts is unusually favourable. Capital gains on disposal of gilts are exempt from CGT for individuals under section 115 of the Taxation of Chargeable Gains Act 1992. The exemption applies regardless of holding period and regardless of whether the gain arose from buying below par or from market price movements.

Coupon income from gilts is taxed as savings income at the investor's marginal rate, with the Personal Savings Allowance applying first. The PSA is GBP 1,000 for basic-rate taxpayers, GBP 500 for higher-rate taxpayers, and nil for additional-rate taxpayers. Above the PSA, savings income is taxed at the marginal rate.

This combination of taxable income and tax-exempt capital gain creates a planning opportunity for higher-rate taxpayers in a GIA (general investment account). A short-dated low-coupon gilt bought below par produces most of its total return as a tax-free capital gain on redemption, with only a small taxable income element. For example, a 1 percent coupon gilt with three years to maturity bought at 95 pence in the pound produces a 5 pence capital gain (tax-free) plus three years of small coupons (taxable). The effective after-tax yield can exceed equivalent savings products.

This planning is particularly attractive to higher and additional-rate taxpayers with savings income above the PSA. The Treasury and HMRC are aware of the structure; it is a long-standing feature of the gilt tax regime rather than an inadvertent loophole.

Corporate bonds in the UK retail market

Corporate bonds are issued by companies seeking to raise debt finance. UK corporate bonds are typically listed on the London Stock Exchange or the Order Book for Retail Bonds (ORB). The ORB, launched in 2010, provides retail access to corporate bonds at typical denominations of GBP 100 to GBP 1,000 per bond, compared with the wholesale market's GBP 100,000 minimum.

Credit risk varies by issuer. Investment-grade bonds (rated BBB-/Baa3 and above by S&P, Moody's, or Fitch) have low default risk historically. High-yield bonds (rated below investment grade) carry materially higher default risk and pay correspondingly higher yields. UK retail platforms typically offer access to investment-grade UK corporate bonds and selected sterling-denominated bonds from overseas issuers.

Corporate bond coupons and gains are taxable in the standard way outside an ISA or SIPP. Coupons are savings income, taxable at the marginal rate after the PSA. Gains are subject to CGT at 18 or 24 percent above the GBP 3,000 annual exempt amount. The CGT exemption that applies to gilts does not apply to corporate bonds.

Bond funds and ETFs

UK investors typically access bonds through funds or ETFs holding a diversified pool. Bond fund OCFs are low (often 0.10 to 0.30 percent for index funds tracking standard benchmarks such as the iBoxx GBP Gilts index or Bloomberg Global Aggregate index). Active bond fund OCFs typically run 0.40 to 0.80 percent.

The fund's duration measures price sensitivity to interest rates: a fund with a 5 year duration falls approximately 5 percent in market value if rates rise 1 percent across the yield curve, and rises approximately 5 percent if rates fall 1 percent. Duration is published in fund factsheets. Investors choosing bond funds for portfolio stability typically prefer shorter-duration funds; investors seeking higher expected returns may prefer longer-duration funds.

Currency hedging matters for overseas bond funds. A USD-denominated bond fund held by a UK sterling investor exposes the investor to USD/GBP movements alongside the underlying bond price changes. Sterling-hedged share classes are widely available; the hedging cost (the cost of forward FX contracts) varies with interest rate differentials.

Inside ISAs and SIPPs, gains and income on bond funds are sheltered from UK tax in the same way as direct gilt holdings. The tax efficiency of direct gilts (CGT exemption) is replicated by the wrapper rather than by the gilt characterisation.

Index-linked gilts and inflation protection

Index-linked gilts have their principal and coupons linked to the Retail Prices Index (RPI). The principal is adjusted upward (or downward, in periods of deflation) by the change in RPI between the gilt's index reference date and the current settlement date. The coupon is calculated as the original nominal rate applied to the index-adjusted principal.

Index-linked gilts protect against unexpected inflation. If inflation surprises to the upside relative to market expectations at the time of purchase, the index-linked gilt outperforms a conventional gilt of the same maturity. The opposite holds if inflation surprises to the downside.

The UK is transitioning from RPI to CPI as the inflation index, with the consultation on transitioning index-linked gilt indexation a long-running policy question. As of 2026, the existing index-linked gilt stock continues to use RPI; new issuance and the transition date are subject to ongoing announcement at dmo.gov.uk and gov.uk.

The real yield on index-linked gilts is the yield over and above the index-linked inflation adjustment. UK real yields have varied substantially: negative real yields prevailed in the 2010s and early 2020s; positive real yields returned from late 2022 with the rise in gilt yields after the brief mini-budget volatility.

Why hold bonds at all

Bonds typically have lower volatility than equities and produce a more predictable income stream. They are a standard component of diversified portfolios, particularly for investors closer to or in retirement. The correlation between bonds and equities varies over time: bonds rallied while equities fell in the 2008 to 2009 crisis (positive diversification); both fell together in 2022 (negative diversification, when both rate rises and equity de-rating moved against the typical 60/40 portfolio).

For drawdown investors, a multi-year bond and cash allocation provides a buffer against sequence risk. Drawing from the bond and cash allocation during equity bear markets allows the equity allocation to recover without forced selling at low prices. This is the core rationale for bond exposure in retirement portfolios.

Allocation between gilts and corporate bonds depends on risk appetite. Investment-grade UK corporate bonds typically pay 100 to 200 basis points above equivalent gilts to compensate for credit risk; high-yield bonds pay 300 to 600 basis points or more. The additional yield comes with materially higher default risk and price volatility.

Buying gilts directly through Computershare

The DMO Approved Group of Investors scheme administered by Computershare allows retail investors to buy and sell gilts directly. The scheme typically offers narrower bid-ask spreads than retail platforms for gilt trades and provides direct access to new issue auctions.

The application process requires identity verification and a Computershare investor account. Purchases can be made at primary auctions (limited to certain gilt lines, with retail allocation set by the DMO) or in the secondary market through the broker network associated with the scheme.

Most retail investors access gilts through their general investment platform (SIPP or ISA) using the platform's standard equity trading interface. Major UK platforms offer access to all major gilt lines; smaller platforms may have limited gilt coverage. The platform charges its standard dealing fee per trade, plus the bid-ask spread.

Quantitative easing, tightening, and gilt market structure

The Bank of England's Asset Purchase Facility, used during quantitative easing operations from 2009 to 2021, accumulated a substantial holding of UK gilts. At peak, the APF held over GBP 800 billion of gilts, equivalent to a significant portion of total outstanding stock. From 2022, the Bank began active quantitative tightening, selling gilts back to the market and allowing maturing gilts to roll off without reinvestment.

The September 2022 gilt market volatility, triggered by the mini-budget's unfunded fiscal commitments, exposed structural vulnerabilities including the liability-driven investment positions of UK defined benefit pension schemes. The Bank of England intervened with emergency gilt purchases to restore market function. The Pensions Regulator subsequently issued enhanced guidance for DB scheme LDI strategies to reduce systemic risk.

The episode highlighted that gilt yields and prices can move sharply in response to fiscal credibility shocks even where the underlying credit rating is unaffected. Retail investors holding long-dated gilts during the 2022 episode experienced double-digit percentage price falls. The mark-to-market loss is realised only on sale; gilts held to maturity continue to redeem at par regardless of interim price movements.

Disclaimer

This article provides general information on bonds and gilts and is not personal financial advice. Bond prices can fall, particularly when interest rates rise. Credit risk on corporate bonds is borne by the investor and can result in loss of principal in default scenarios.

Frequently asked questions

Are gilts tax-free?

Capital gains on gilts are exempt from UK CGT for individuals under section 115 of the Taxation of Chargeable Gains Act 1992. Coupon income is taxable as savings income, covered first by the Personal Savings Allowance (GBP 1,000 basic rate, GBP 500 higher rate, nil additional rate). The combination of taxable income and tax-exempt capital gain creates a planning opportunity for higher-rate taxpayers using short-dated low-coupon gilts bought below par.

Can gilts be bought directly?

Yes. UK retail investors can buy gilts through major platforms (where the platform supports gilt trading) or through the DMO's Approved Group of Investors network administered by Computershare. The Approved Group route offers direct access to new issue auctions and typically narrower bid-ask spreads than retail platforms.

What is duration?

Duration measures the sensitivity of a bond or bond fund's price to a 1 percent change in interest rates across the yield curve. A 5 year duration fund typically falls approximately 5 percent if rates rise 1 percent, and rises approximately 5 percent if rates fall 1 percent. Longer-dated bonds have higher duration and greater interest rate sensitivity than shorter-dated bonds.

Are index-linked gilts a hedge against inflation?

Index-linked gilts have their principal and coupons linked to the Retail Prices Index (RPI). They protect against unexpected inflation: if inflation surprises to the upside relative to expectations at the time of purchase, the index-linked gilt outperforms an equivalent conventional gilt. They underperform if inflation surprises to the downside.

What is the credit rating of UK gilts?

UK gilts are typically rated in the AA range by the major agencies (S&P, Moody's, Fitch), reflecting the high credit standing of the UK government. The exact rating varies with fiscal and political developments. Gilts are the lowest-credit-risk sterling fixed-income instrument available; the UK government has not defaulted on its sterling debt in the modern era.

Frequently asked questions

Are gilts tax-free?

Capital gains on gilts are exempt from UK CGT for individuals under section 115 of the Taxation of Chargeable Gains Act 1992. Coupon income is taxable as savings income, covered first by the Personal Savings Allowance. The combination creates a planning opportunity for higher-rate taxpayers using short-dated low-coupon gilts bought below par.

Can gilts be bought directly?

Yes. UK retail investors can buy gilts through major platforms or through the DMO's Approved Group of Investors network administered by Computershare. The Approved Group route offers direct access to new issue auctions and typically narrower bid-ask spreads than retail platforms.

What is duration?

Duration measures the sensitivity of a bond or bond fund's price to a 1 percent change in interest rates. A 5 year duration fund typically falls approximately 5 percent if rates rise 1 percent. Longer-dated bonds have higher duration.

Are index-linked gilts a hedge against inflation?

Index-linked gilts have their principal and coupons linked to RPI. They protect against unexpected inflation: if inflation surprises to the upside relative to expectations at purchase, the index-linked gilt outperforms an equivalent conventional gilt.

What is the credit rating of UK gilts?

UK gilts are typically rated in the AA range by the major agencies (S&P, Moody's, Fitch), reflecting the high credit standing of the UK government. The exact rating varies with fiscal and political developments.