Seeking comment: Tax perks of investing in gilts

UK government bonds (gilts) trading below their £100 face value offer a compelling, tax-efficient alternative to cash savings, particularly for higher-rate (40%) and additional-rate (45%) taxpayers. Under Section 115 TCGA 1992, capital gains realized at maturity are completely exempt from Capital Gains Tax (CGT). While semi-annual coupons remain subject to Income Tax, low-coupon gilts return the vast majority of their yield as tax-free capital growth. This structural split allows high earners with exhausted Personal Savings Allowances to achieve a Gross Equivalent Yield (GEY) that easily beats taxable savings rates. Short-dated gilts also eliminate long-term interest rate risk, providing predictable tax-free sterling liquidity. For UK resident non-doms, gilts generate tax-free onshore capital growth, though coupons remain UK-situs income. For non-UK residents, coupon withholding tax is zero, but the CGT benefit ultimately depends on their home jurisdiction's tax rules.

For higher and additional-rate taxpayers, a low-coupon gilt can make £100 of return work much harder than £100 of savings interest.”

Short-dated gilts trading below their £100 redemption value can be attractive for money needed over a known timeframe. The coupon is taxable as income, but the uplift when an individual gilt is redeemed at £100 is generally exempt from Capital Gains Tax. That can mean more of the return is tax-free.

Compare that with a savings account, where an additional-rate taxpayer could lose 45% of taxable interest to income tax and has no Personal Savings Allowance. You therefore need to compare the net return after tax, not simply the advertised savings rate.

Gilts still require research: check the purchase price, coupon, yield and maturity date. Selling before maturity can mean getting back less, while longer-dated gilts can be much more volatile.

The key isn't the headline rate — it's what you actually keep after tax.

Gilts are exempt from CGT, a key attraction for higher rate taxpayers. Buy a low coupon gilt below its £100 redemption value and, if held to maturity, the uplift to par is CGT free. The coupon is still taxed as savings income, but with a low coupon gilt it is a small part of the overall return.
Take the 0.875% Treasury Gilt maturing in Oct 2029. Priced at 88.8, its yield to maturity is about 4.76%. For every £88.80 invested, you receive £100 at maturity, so the £11.20 capital uplift is tax free; only the annual coupons are subject to income tax. Allowing for 40% tax on coupons, the total after tax return is roughly 14.4%, or 4.4% pa. By comparison, cash paying 3.75% leaves a higher rate taxpayer just 2.25% pa after 40% tax on interest.
Gilts can also be attractive when the maturity matches the date the money is needed. Holding an individual gilt to redemption provides certainty, backed by UK govt. It’s not a loophole, but a feature of the tax system that remains surprisingly underused.

Gilts tend to be something we see used where people have one-off, known expenditure items in the future like a tax bill, car payment, or mortgage/loan that needs to be cleared.

A gilt priced below par will often have a low coupon (the interest that's paid along the way), which could mean barely anything received back in interest. The real gain comes from the amount received at maturity though, which is £100 per unit.

Take Treasury 0.125% 31/01/2028 as an example, which is currently priced at £94.50.

The attraction for higher or additional rate tax payers is that their original £94.50 invested today, becomes £100 at the end of January 2028. The gain is exempt from Capital Gains Tax, so £5.50 on a £94.50 investment is around 5.8% net of all taxes.

For higher rate and additional rate tax payers to receive this same level of return, they'd need something that pays roughly 9.6% and 10.5% over that same 16 month period before tax respectively.