Unlocking the strategic value of UK gilts

Most government borrowing is secured using the gilt market and, with the need for government borrowing showing no sign of abating in the future, gilts are likely to continue to be issued.

There are two main categories of gilts: conventional gilts and index-linked gilts.

Conventional gilts generally pay a coupon twice a year and repay the principal (normally tranches of £100) when it reaches maturity.

With an index-linked gilt, both the coupon and the principal increase in line with Retail Price Index inflation.

For both, at issue, or on subsequent purchase, the price paid may be more or less than the principal. As both are backed by the government, the likelihood of default is seen as extremely low so gilts are seen to be low-risk investments when held to maturity.

How do gilts work?

Gilt prices and yields move in opposite directions, falling prices drive higher yields. The current yields on gilts are at the highest they have been for a long time, making them attractive as investments.

Whilst there is a secondary market for gilts, it is important to note that the repayment of the principal is only guaranteed at maturity. An investor selling before then will get whatever the market deems the gilt to be worth at that point. If interest rates rise after purchase, the market price of a gilt can fall so that the yield moves towards those of newer issues with higher coupons. A capital loss may therefore be realised on disposal before maturity.

A gilt with a high coupon may also trade at a price in excess of the principal meaning that a capital loss may be realised if the gilt is held to maturity.

The purchase price of a gilt will frequently reflect:

• Current market sentiment on future interest rates when compared to the gilt’s
  coupon; and
• The length of time until the redemption date.

So, for example, currently, £100 of Treasury 0.375% 2030 (redemption 22.10.2030) could be purchased on 21 October 2026 for around £83.75. This equates to a running yield of around 0.45% p.a. and a redemption yield of around 4.90% p.a.

Gilt yields have risen sharply in 2026 with 30-year gilts yielding around 5.9% (the highest since 1998) and 10-year gilts around 5.4%. This reflects concerns about inflation, exchange rates and the level of government borrowing. The increase in gilt yields has been behind the recent boost to annuity rates. 

Most investors will purchase gilts via a stockbroker or dealing platform. Collective gilt funds, which invest across a range of gilt issues are also available but such funds do not benefit from the capital gains tax exemption enjoyed by directly held gilts.

What are the main attractions of gilts to investors?

• As they are issued by the UK government, they offer investors considerable security against default;
• They offer a fixed (known) level of income - taxed as savings income against which the investor might be able to offset their starting rate tax band and personal savings allowance;
• Investors know how much will be returned to them if they hold the gilt to the redemption date;
• In many cases, a large part of the returns will comprise a capital gain that is free of capital gains tax (CGT) - an important consideration for higher and additional rate taxpayers; and
• Index-linked gilts are attractive to investors who want an investment that will combat inflationary increases.

Using gilts in financial planning

• Tax-free capital appreciation
  Directly held gilts are exempt from CGT so, while an investor will pay income tax on coupons, any increase in the price of the gilt on sale or redemption is not subject to CGT.
  Short-dated, low coupon gilts can be attractive for higher and additional rate taxpayers because more of the return comes as a tax-free gain rather than taxable coupons.
   
• Meeting future liabilities and/ or providing an income stream
  The purchase of gilts with a range of redemption dates (gilt ladders) can provide a tax-effective series of payments to meet known future liabilities and/ or supplement income.
   
• Providing security for lifetime gifting
  Gilt ladders can also be used to generate tax-efficient returns for higher or additional rate taxpaying investors to give the security to make lifetime gifts of other assets as part of their inheritance tax planning.
   
• Providing an effective hedge against inflation
  Savings in deposit accounts are very likely to lose value in real terms. Index-linked gilts can provide the effective security of a deposit account (without FSCS limits) while also hedging against inflation as both the coupon and the principal increase in line with the RPI.
  As the coupon on most index-linked gilts is very low, virtually all the returns are tax-free gains. For an investor who is confident that they can hold the gilt to maturity, the after-inflation return is guaranteed.
  As an example, an investor buying the Treasury 0.125% 2036 index-linked gilt on 21 October 2026 and holding it to maturity on 22 November 2036 would receive a running yield of 0.15% p.a. and an after-inflation redemption yield of around 2.07% p.a. giving a real return of 28% at maturity.

Gilts are often overlooked within portfolios but can provide useful diversification of risk and returns when compared to equities, especially during periods of market volatility.

If you or someone you know would like some guidance in this area, get in touch and arrange a free initial consultation.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

Investment returns are not guaranteed, and you may get back less than you originally invested. 

Past performance is not a guide to future returns.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The information in this article is correct as of 22/10/2026.