The word “gilt” is a piece of Victorian marketing.
When the British government borrowed money, it issued a certificate promising to pay you back with interest. To signal that this promise was about as safe as a promise gets, backed by the full weight of the state, the grandest of these certificates were printed with edges trimmed in real gold leaf. Gilt-edged. The name outlived the paper.
Two centuries on, the gold trim is gone but the safety is much the same. A gilt is still just a loan to the UK government, which pays you a fixed rate of interest, called the coupon, and hands back your capital on a set date. Reliable, a bit dull, the financial equivalent of a well-made umbrella.
And then there’s the tax quirk, which is where it gets interesting for one particular sort of person.
That person is a higher or additional-rate taxpayer sitting on a meaningful pile of cash. Because the way a gilt is taxed depends on where the return comes from, and gilts have a split personality.
The coupon, the regular interest, is taxed as income, at your marginal rate. Nothing special there. But any capital gain you make on a gilt is completely free of capital gains tax. Buy a gilt for £90 and see it repaid at £100, and that £10 gain is yours in full. No CGT, no reporting, nothing.
What makes it useful is a leftover from the era of near-zero interest rates.
Back then, the government issued gilts paying tiny coupons, some as low as 0.125% a year. Now that rates are higher, nobody will pay full price for a bond yielding almost nothing, so these “low-coupon” gilts trade well below their £100 redemption value. Which means most of your return comes not from the tiny taxable coupon, but from the tax-free capital gain as the price climbs back to £100 at maturity.
Take a gilt paying a 0.125% coupon and maturing in early 2028. Recently it changed hands at around £88.69, to be repaid at £100. Hold it to maturity and the total return works out at roughly 4.1% a year.
Almost all of that 4.1% is the capital gain, which is tax-free. Only the sliver of coupon is taxed. So a 40% taxpayer keeps almost the whole 4.1%, ending up around 4.07% after tax. To match that from an ordinary savings account, where every penny of interest is taxed, a 40% taxpayer would need to find about 6.8% gross. An additional-rate taxpayer would need nearer 7.4%.
Good luck finding a savings account paying that.
It’s worth being clear about what this is and isn’t. It isn’t actually a loophole; it’s simply how gilts have been taxed for decades, and HMRC is entirely aware of it. It isn’t magic extra return either, the headline yield is roughly what you’d expect from a safe government bond. The gain is purely in the tax treatment, which is exactly what makes it suit someone whose savings interest is otherwise being taxed at 40% or 45%.
And there are catches, because there always are. The coupon is still taxable. The personal savings allowance, the slice of interest you can earn tax-free, is only £1,000 for basic-rate taxpayers, £500 for higher-rate, and nothing at all once you’re an additional-rate taxpayer, so higher earners feel the tax on ordinary savings most keenly, which is rather the point. And while a gilt held to maturity is about as secure as investments come, its price can fall as well as rise if you need to sell early, because gilt prices move with interest rates. Capital is at risk if you don’t hold to the end.
The individual gilt, the timing and whether it fits at all depends entirely on your own tax position and when you need the money. Prices and yields move daily; the figures above were true on a particular afternoon and won’t be tomorrow.
But the underlying point is durable enough. For a higher-rate taxpayer with cash sitting in a taxed account, there’s a gold-edged old instrument that the tax system treats unusually kindly, and it’s hiding in plain sight.
We help people in Hook and across Hampshire, Surrey, Berkshire, Sussex and Kent work out where their cash is actually working hardest after tax, which is often not where they’ve left it.
Altor Wealth Management LLP is authorised and regulated by the Financial Conduct Authority (FCA number 769033). Registered office: Landmark House, Station Road, Hook, Hampshire RG27 9HA. This article is general information, not personal advice or a recommendation to buy any particular investment. The value of investments can fall as well as rise and you may get back less than you invest; gilt prices move with interest rates, and capital is at risk if a gilt is sold before maturity. Tax treatment depends on individual circumstances and is based on current legislation, which can change. Figures are illustrative and were accurate at the time of writing only.