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With the cash ISA allowance for under-65s set to fall from £20,000 to £12,000 in 2027, many savers may find it harder to shelter their cash from tax, making gilts an increasingly appealing option.
Gilts are government-backed bonds that offer a secure way to earn interest. They also come with unique tax advantages, particularly when it comes to capital gains tax (CGT). Understanding these benefits can help investors ensure as much of their returns as possible are sheltered from tax.
Here, we explain how gilts work, and why changes to cash ISAs next year might boost their popularity among savers looking for low-risk tax-efficient homes for their money.
What are gilts?
Gilts are bonds issued by the UK government to borrow money from investors.
When you buy a gilt, you are effectively lending money to the government in exchange for regular interest payments, known as ‘coupons’, and your capital back when the gilt matures.
Gilts are considered one of the safest investments because they are backed by the UK Treasury, meaning the risk of default is extremely low. In very simple terms, the price of gilts falls, and yields go up if more investors are selling rather than buying the gilts that are already on the market. Conversely, when yields fall, the price of gilts rises.
They come in several different forms, including:
- Conventional gilts: These pay a fixed interest rate until maturity
- Index-linked gilts: Interest and the capital invested are adjusted according to inflation (linked to the Retail Prices Index)
- Short, medium, and long-dated gilts: Depending on how long there is until the bond matures.
How gilts are taxed
The interest (coupon) payments from gilts are taxable as income, and so are subject to income tax at your marginal rate.
While savings interest is taxable, most people can earn some interest tax-free through their Personal Savings Allowance (PSA). However, once this is used up, particularly for higher and additional-rate taxpayers, returns from savings accounts can be heavily taxed, making gilts comparatively more tax-efficient.
Learn more about the PSA in our guide What is the Personal Savings Allowance?
However, gilts offer a major advantage when it comes to capital gains, as unlike other investments such as company shares or corporate bonds, gilts are exempt from CGT.
Because some gilts are currently trading below their face value, investors can receive part of their return as a capital gain rather than income, and that portion is completely tax-free. This means if you sell a gilt for more than you paid for it, any profit you make is not subject to capital gains tax. This exemption applies to both conventional and index-linked gilts.
For example, if you bought a gilt for £10,000 and sold it later for £11,000, you keep the £1,000 profit tax-free. This makes gilts an attractive option for investors concerned about CGT liabilities, especially those nearing their annual CGT allowance.
Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, the online investment platform, said: “Gilt yields have been on the rise recently and in many cases, gilts can be purchased at prices below what they will mature at, meaning much of the return will come from a tax-exempt capital gain. This makes them especially attractive for higher and additional rate taxpayers compared to the post-tax returns on even the most competitive savings accounts.”
What are the downsides of investing in gilts?
While gilts have clear CGT benefits, investors should be aware of some downsides.
For example, gilts typically offer lower interest rates than corporate bonds or equities. While gains from gilts are tax-free, coupon payments are subject to income tax.
The market price of gilts can fall if interest rates rise, though this does not affect the CGT exemption if they are held to maturity.
How to buy gilts
Gilts can be bought directly through:
- Brokerage accounts or investment platforms (where gilts trade like shares)
- Gilts-focused funds or Exchange-traded funds (ETFs)
For investors seeking both security and tax efficiency, gilts can form an important part of a diversified portfolio, and often particularly appeal to retirees or those planning for future cash needs.
A final thought…
Gilts aren’t just a safe haven; they can also be a tax-efficient way for investors who want to grow their money without being hit by capital gains tax. By combining the security of government-backed bonds with CGT-free profits, they can offer a useful option for UK savers, particularly those who have already used up their ISA allowance.
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