← Guides / UK Investment & Savings

Gilt-Edged Securities

Gilts (gilt-edged securities) are bonds issued by the UK government. They are considered one of the safest fixed-income investments because they are backed by HM Treasury. Gilts pay a fixed coupon (interest) semi-annually and return the principal at maturity. They are traded on the London Stock Exchange and can be bought through most investment platforms or directly from the Debt Management Office (DMO). For UK investors, gilts offer unique tax advantages — capital gains on gilts are exempt from Capital Gains Tax for individuals, making them a tax-efficient way to generate income and capital returns. The tax year for reporting gilt income runs from 6 April to 5 April.

Tax Treatment of the Coupon

Interest payments (coupons) on gilts are treated as savings income and subject to Income Tax at your marginal rate. However, the coupon is paid gross — no tax is deducted at source. You report the coupon income on your Self Assessment tax return, and it benefits from the Personal Savings Allowance (basic-rate taxpayers can earn £1,000 of savings interest tax-free; higher-rate £500; additional-rate £0). Because gilts typically have a low running yield compared to corporate bonds, the coupon tax is often modest relative to the total return. Investors looking to minimise coupon tax can consider low-coupon gilts (including strips) or index-linked gilts where a portion of the return is in the capital uplift rather than the coupon.

Capital Gains Exemption

One of the most attractive features of gilts is that any capital gain realised on disposal or maturity is exempt from Capital Gains Tax. This applies to all gilts — conventional, index-linked, and strips. For a higher-rate taxpayer, this means that a gilt purchased at a discount and held to maturity produces a tax-free capital return, while the coupon is taxed as income. This asymmetry creates tax-planning opportunities. For example, an investor in the higher-rate tax band might prefer a low-coupon gilt trading at a deep discount, because the capital uplift at maturity is tax-free while only the small coupon is taxed at 40%. Conversely, a basic-rate taxpayer might prefer a higher-coupon gilt to maximise income taxed at only 20%.

Accrued Income Scheme

When you buy a gilt between coupon payment dates, the price includes accrued interest from the last coupon date. The accrued income scheme (AIS) ensures that the buyer and seller are taxed on the correct amount of interest. The seller is treated as receiving interest up to the date of sale (included in the sale proceeds), and the buyer is treated as receiving interest from the date of purchase onwards (so the buyer deducts the accrued interest paid from their first coupon receipt when reporting income). This prevents interest from being artificially converted into a capital gain by timing purchases just before or after coupon dates. The AIS applies to all gilts and most other bonds. You must report accrued interest on your Self Assessment return.

Index-Linked Gilts

Index-linked gilts have their principal and coupon payments adjusted in line with the Retail Prices Index (RPI), providing protection against inflation. The uplift in principal is treated as capital for CGT purposes — and because gilts are exempt from CGT, the inflation uplift is tax-free. The coupon is paid on the inflation-adjusted principal and is taxable as income. For example, if a gilt has a 0.5% real coupon and RPI rises by 3%, the total return is approximately 3.5%, of which 3% is a tax-free capital uplift and 0.5% is taxable income. This makes index-linked gilts extremely attractive for higher and additional-rate taxpayers seeking inflation protection. The DMO issues a range of index-linked gilts with maturities from 5 to over 50 years.

Gilt Strips

Gilt strips are created by separating (stripping) a conventional gilt into individual zero-coupon components — each coupon payment becomes a separate strip, and the final principal payment becomes another strip. Strips pay no coupon; instead, they are issued at a deep discount and redeemed at par. The return is entirely in the capital uplift, which is CGT-exempt. Strips are therefore the most tax-efficient gilt product for higher-rate taxpayers — all of the return is tax-free (since the coupon is zero). However, strips are more volatile than conventional gilts (their duration is maximised) and they are typically held by institutional investors. Individual investors can buy strips through the DMO's Purchase and Sale Service or on the secondary market through a broker. There is also an accrued income scheme treatment for strips.

Buying Gilts

You can buy gilts through a stockbroker, investment platform (e.g. Hargreaves Lansdown, AJ Bell, Interactive Investor), or directly from the DMO via its Purchase and Sale Service (minimum £1,000 face value). On most platforms, gilt trading costs are low (typically £5–£10 per trade) and there are no Stamp Duty or stamp duty reserve tax charges on gilts. Gilts can also be held within an ISA or SIPP, where both the coupon and capital gains are tax-free. When held in a SIPP, the tax treatment is broadly the same as any other SIPP investment — contributions attract Income Tax relief at your marginal rate, and withdrawals are taxed as income. Gilts held in an ISA generate tax-free income and capital gains, which is particularly valuable for higher-rate taxpayers.