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UK Gilts Taxation Guide for UK Tax Resident Individuals

Created on 2024-11-16 by Vincent

Income Tax on Gilt Interest

How Gilt Interest is Taxed

Gilt interest is treated as savings income for tax purposes. Since 2016, interest has been paid gross (without tax deducted at source), meaning recipients must account for any tax due through their tax return.

Tax Band Personal Savings Allowance Savings Tax Rate
Basic Rate (20%) £1,000 20%
Higher Rate (40%) £500 40%
Additional Rate (45%) £0 45%

If your non-savings income is below £17,570, you may be eligible for the 0% starting rate for savings on up to £5,000 of savings income, including gilt interest.

Capital Gains Tax on Gilts

CGT Exemption Explained

UK government gilts enjoy a special tax status regarding capital gains:

  • All gains from gilt disposals are exempt from Capital Gains Tax
  • This applies to both conventional and index-linked gilts
  • The exemption covers gains from both market value increases and redemption proceeds
  • Losses on gilts cannot be used to offset gains from other investments
Important: The CGT exemption applies only to direct gilt holdings. Gilt fund investments may be subject to normal CGT rules.

Tax-Efficient Gilt Selection

When possible it is recommended to use one of the following tax-advantaged accounts to invest in Gilts:
Strategy Implementation Benefits
ISA Wrapping Hold gilts within an ISA wrapper
  • Tax-free interest payments
  • No reporting requirements
  • Flexible access to funds
Pension Investment Include gilts in SIPP or personal pension
  • Tax relief on contributions
  • Tax-free growth
  • 25% tax-free lump sum at retirement
Important: When investing in gilts outside of tax-advantaged accounts (ISA, SIPP), the coupon rate becomes a crucial consideration for tax efficiency.

Key Principles

  • Lower coupon gilts often result in better after-tax returns for higher-rate taxpayers
  • Capital gains from gilts remain tax-free, while interest (coupon) payments are taxable
  • Gilts trading below par (discount gilts) effectively convert some of the return from taxable interest to tax-free capital gains

Market Pricing Dynamics

Lower-coupon gilts often trade at lower yields due to their tax advantages:

  • Higher-rate taxpayers create natural demand for low-coupon gilts
  • This demand can compress yields on low-coupon issues
  • The yield difference may not fully compensate for the tax advantage

Post-Tax Yield Comparison Tool

Use our free tool to compare the effective post-tax yields of different gilts based on your marginal tax rate, the gilt's coupon rate and the current Gilts market yield:

Gilts Tax Image1

Special Considerations

Index-linked Gilts

Index-linked gilts offer protection against inflation through:

  • Inflation-adjusted interest payments
  • Inflation-adjusted principal repayment
  • Both adjustments are based on RPI changes
  • Inflation uplift is tax-exempt

The inflation adjustment to both interest and principal is tax-exempt, making these particularly attractive for tax-efficient investing.

Gilt Funds

Investing in gilts through funds has different tax implications:

  • Capital gains are not exempt from CGT
  • Income distributions may be treated as interest
  • Different reporting requirements apply
  • May be subject to fund-level charges

Consider the tax efficiency of direct gilt holdings versus fund investments based on your circumstances.