Published by New Capital Link | Your Guide to Smart, Tax-Efficient Investment
If you are looking for a smart, tax-efficient way to put your money to work, gilts could be exactly the opportunity you have been waiting for. Often overlooked in favour of more traditional savings products, gilts, also known as UK government bonds, can deliver compelling, secure returns that even beat savings accounts once you factor in tax. This guide walks you through everything you need to know to invest in gilts with confidence.
What Are Gilts?
Gilts are bonds issued by the UK Government as a way of borrowing money to fund public services. When you buy a gilt, you are effectively lending money to the Government. In return, the Government promises to pay you a fixed rate of interest, known as the ‘coupon’, at regular intervals, typically twice a year. When the gilt reaches its maturity date, you receive the full face value back, which is 100 pounds per gilt.
Because they are backed by the UK Government, which has never defaulted on gilt repayments, gilts are widely regarded as one of the safest investment vehicles available. They combine the reliability of a fixed savings account with the added benefits of a tradeable financial instrument, giving investors both security and flexibility.
If you are new to fixed-income investing, it is worth reading our guide to asset-backed bonds alongside this one, as the two instruments share a number of characteristics and work well together in a diversified portfolio.
Key Terms to Know
Before diving in, it helps to understand a few essential concepts:
- Coupon: The fixed annual interest rate paid to the gilt holder, usually distributed in two equal payments every six months. For example, a gilt with a 3% coupon pays 3 pounds per year on each 100 pounds of face value.
- Maturity (Par) Value: The amount you receive when the gilt reaches the end of its term, almost always 100 pounds per gilt, regardless of what you paid for it.
- Maturity Date: The date on which the Government repays the face value and makes the final coupon payment. Gilts are typically named to reflect this, for example: ‘TREASURY 0.125% 30/01/2026’.
- Clean vs Dirty Price: The ‘clean’ price is the quoted market price of the gilt, not including any accrued interest. The ‘dirty’ price, which is what you actually pay, may be slightly higher if the previous holder has earned but not yet received a coupon payment. Investment platforms generally display the clean price for easy comparison.
The Tax Advantage: Why Gilts Are So Attractive
One of the most powerful and most underappreciated features of gilts is their exceptional tax efficiency. This is where the real opportunity lies for savvy investors.
The strategy that has grown in popularity is buying low-coupon gilts at a discount to their face value, then holding them to maturity. Here is why this approach is so effective:
- Minimal income tax on the coupon: Because low-coupon gilts pay very little interest, the taxable income element is kept small. If coupon payments fall within your Personal Savings Allowance, they are entirely tax-free.
- Capital gains that are completely tax-free: This is the headline advantage. When you hold a gilt to maturity and receive the full 100 pounds face value, any gain you have made because you bought at a discount is exempt from Capital Gains Tax. Unlike almost every other investment, this gain does not even count towards your annual CGT allowance, which stands at 3,000 pounds for the 2024/25 tax year. This unique feature makes gilts extraordinarily efficient for growing wealth.
- Outperform savings accounts after tax: For basic-rate taxpayers, this strategy can match savings accounts paying significantly higher gross rates. For higher-rate taxpayers, the advantage is even more pronounced. In many scenarios, you would need a savings account paying over 6% gross to achieve the same after-tax return, and those rates are simply not available on the high street.
For a broader look at how to keep more of your returns away from the taxman, see our guide on how to make your investments tax-free.
A Practical Example
To illustrate the opportunity: consider a short-term gilt maturing within the next year or two, with a low coupon of around 0.125% and a current market price of approximately 95 pounds. Buy it today, hold it to maturity, and you receive 100 pounds back, a gain of around 5 pounds per gilt, completely free of Capital Gains Tax. Add in the small coupon payments along the way, and the annualised return compares very favourably against equivalent savings products, especially once you factor in your personal tax position.
For higher-rate and additional-rate taxpayers, the mathematics become particularly compelling, as the tax saving on equivalent savings interest would be substantial.
How Gilts Fit Into a Wider Investment Strategy
Gilts work best as one component of a well-considered investment strategy. They are particularly well suited to investors who have already maximised their Cash ISA allowance for the year. If you are unsure whether you are making full use of your ISA options, our guide to ISA eligible investments is a useful starting point.
Gilts can also complement other fixed-income instruments. Our guides to property bonds and convertible loan notes explore further options for investors seeking predictable, income-generating returns backed by tangible assets.
If you are planning for the longer term, gilts can also play a role in a retirement-focused portfolio. See our guide on how to invest for retirement for a comprehensive overview of how different asset classes can work together to build lasting financial security.
Step-by-Step: How to Invest in Gilts
Step 1: Define Your Investment Goals
Start by being clear about what you want to achieve. Are you looking to shelter a lump sum from tax on savings interest? Seeking a reliable income stream? Or aiming to grow your capital over a defined period? Gilts can serve all of these purposes, but the specific gilt you choose, its maturity date, coupon rate, and current price, should reflect your personal objectives.
Step 2: Assess Your Tax Position
The tax benefits of gilt investing are most powerful when tailored to your personal circumstances. Consider how much of your Personal Savings Allowance you have already used, your marginal income tax rate, and your capital gains position. Basic-rate taxpayers benefit significantly; higher-rate and additional-rate taxpayers often find the advantages even greater.
Step 3: Choose the Right Gilt
For tax-efficient investing, focus on low-coupon gilts trading at a discount to their 100 pound face value and maturing within the next one to three years. These gilts minimise the taxable income element whilst maximising the tax-free capital gain at maturity. Compare the annualised return against current savings rates, accounting for your tax position, to ensure you are getting the best deal for your money.
Pay attention to both the clean and dirty prices when researching gilts, as the price you actually pay may differ slightly from the quoted price depending on where you are in the coupon payment cycle.
Step 4: Open an Investment Account
Gilts are most conveniently purchased through a stockbroker or investment platform. You can hold them in a standard general investment account or within a Stocks and Shares ISA. If you are considering moving existing cash into a more productive home, our guide on transferring a Cash ISA to a Stocks and Shares ISA explains the process clearly. Holding gilts within a Stocks and Shares ISA provides an extra layer of protection for the coupon payments, shielding them from income tax, though the capital gain is already tax-free regardless of account type.
When selecting a platform, compare trading fees and ongoing account charges carefully, as these will affect your overall return, particularly on smaller investments or shorter-dated gilts where margins are tighter.
Step 5: Hold to Maturity and Reinvest
Once you have purchased your gilt, the simplest and most tax-efficient strategy is to hold it to maturity and collect the tax-free capital gain. When it matures, you can reassess the market and reinvest in the next opportunity. Many investors choose to roll their capital from one maturing gilt to the next, systematically compounding their tax-free gains over time, which is a highly effective long-term strategy.
Gilts vs Other Fixed-Income Alternatives
Gilts sit at the lower-risk end of the fixed-income spectrum. If you are prepared to accept a modest increase in risk in exchange for higher potential returns, it is worth exploring property bonds, which are backed by UK real estate rather than government borrowing. Our dedicated comparison of property investment bonds versus buy-to-let sets out the yield differences in practical terms.
For investors interested in understanding the broader landscape of fixed-income instruments, our guide to the key differences between asset-backed bonds, covered bonds, and asset-backed securities provides a thorough grounding in the options available.
Is Gilt Investing Right for You?
Gilt investing is particularly well suited to those who have already maximised their Cash ISA allowance for the tax year, are paying income tax on savings interest, and are looking for a secure, predictable home for their capital. The defined maturity date and government-backed return provide a level of certainty that is difficult to match elsewhere.
As with any investment, gilts work best as part of a broader, diversified financial strategy. Whilst they are among the safest instruments available, it is worth bearing in mind that if you sell before maturity, the price you receive will depend on market conditions at the time.
Make Your Money Work Harder With New Capital Link
At New Capital Link, we are passionate about helping our clients make informed, confident investment decisions. Whether you are new to gilt investing or looking to optimise an existing strategy, our specialists are here to provide the clarity and guidance you deserve. You can read more about our approach and what our clients say on our New Capital Link reviews page.
We believe great investment decisions start with great information, and that every investor deserves access to the kind of expert knowledge that genuinely makes a difference. Get in touch with the team at New Capital Link today, or explore our full range of alternative investment ideas for 2026 to discover how your money can work harder for your financial future.
