What is a Gilt?
A Gilt (aka a Bond) is a UK Government liability in Sterling, issued by HM Treasury and managed by the UK Debt Management Office (DMO). They are called gilts because the original certificates issued by the British government had gilded edges.
The term “gilt” or “gilt-edged security” is also a reference to the primary characteristic of gilts as an investment: their security. This reflects the fact that the British Government has never failed to make interest or principal payments on gilts as they fall due.
Gilts are issues with a fixed term maturity and there are two types:
Why Are Gilts Attractive Right Now?
Discounted Prices
Following a long period of historically low interest rates, many gilts were issued with minimal coupon payments and are now approaching maturity. When rates surged in 2022, the value of these existing gilts dropped significantly. As a result, many are still trading below their par value — that’s the £100 the UK Government guarantees to repay at maturity. This means investors can currently purchase gilts at a discount, locking in a guaranteed uplift when held to redemption.
Favourable Tax Treatment
While gilt coupons are paid semi-annually and taxed as income, the real advantage lies in how capital gains are treated. Unlike most investments, gains made when gilts are sold or redeemed are completely free from Capital Gains Tax. With many low coupon gilts trading below par, most of the return is likely to come from these tax-free gains. In other words, investors can often achieve better net returns than with taxable alternatives.
What Are the Risks?
Gilts are widely considered ‘risk-free’ because they’re backed by the UK Government, offering strong capital security. However, they are not entirely without risk. Prices can fluctuate with changing interest rate expectations — rising rates may push prices lower, while falling rates can boost valuations. That said, by purchasing stock below par and holding to maturity, investors can still benefit from tax-free capital gains, regardless of short-term price movements.
Who should consider buying gilts?
If you are a higher or additional rate taxpayer with cash to invest, this could be a suitable investment for you. It is particularly useful if you have a CGT bill to pay in January 2027 (assuming a deal completes in the 25/26 tax year). If a deal completes after this tax year, there are other similar options.
There is one gilt that matures at the end of October 2026 and could be used to meet any CGT liability whilst growing largely tax free. Below is an example using indicative figures.
Example
If the £1m was put into a bank account then you could potentially get about 4% (though it could be less or slightly more), equating to c.£100,000 until January 2028.
However, the whole of that £100,000 return is subject to income tax at 45%, therefore providing an after-tax return of £55,000.
By investing in the Gilt, the client makes an additional £39,295 net, compared to a bank account.
The client would need a bank account that pays c. 6.5% p.a. to achieve the same net return.
It’s a simple way of making money work harder and getting a better result for clients that want to keep cash.
Disclaimer
The price and value of investments and the income, if any, from them can fall as well as rise. Past performance of investments is not necessarily a guide to future performance.
