Are gilts tax free? The part that is, and the part that is not

You pay no capital gains tax on a gilt. Ever, at any size, in any account.

You do pay income tax on the interest it hands you, at whatever rate you pay on everything else. A gilt delivers your return down two separate channels, and only one of them attracts tax.

Which channel most of your money arrives through is something you get to choose, and on a £100,000 holding over ten years the choice is worth about £20,000 to a higher-rate taxpayer. The figures are below. They read better after a short section on how a gilt pays out, so that comes first.

How a gilt pays you

A gilt is a loan to the UK government. Each one carries a fixed repayment date, a fixed sum repaid, and a fixed rate of interest in the meantime.

The sum repaid is £100 per unit, known as the nominal or face value. Treat it as a unit of measurement rather than a price. Own £50,000 nominal and the government sends you £50,000 on the repayment date, whatever you paid to get there.

The interest is the coupon, quoted as a percentage of that £100. A 5% coupon pays £5 a year per £100 nominal. A 0.125% coupon pays 12.5p.

The price floats. Gilts trade on the open market and move with interest rates, so buying one for something other than £100 is ordinary.

Why old gilts trade below £100

Plenty of gilts in issue were sold when interest rates sat close to zero, so they promise very little interest. Picture one paying 0.125% a year with ten years left to run.

Nobody hands over £100 for 12.5p a year while rates elsewhere sit above 5%. The price falls instead, and it keeps falling until the package as a whole becomes worth buying. What makes it worth buying is the gap that opens up between the discounted price and the £100 the government will pay on the repayment date.

Combine the interest with that gap and you have the gross redemption yield, the annual return on buying at today's price and holding until repayment. It puts every gilt on the same footing whatever its coupon.

So your return arrives down two channels. Interest, twice a year. And the climb from your purchase price up to £100 at the end.

HMRC taxes one of those and leaves the other alone.

The capital gains exemption

Gilts are exempt from capital gains tax under section 115 of the Taxation of Chargeable Gains Act 1992. Tax law files them under qualifying corporate bonds, a technical label whose practical effect is that gains on them never become chargeable.

The exemption runs wider than people tend to assume.

No cap applies. The £3,000 annual exempt amount plays no part, because the gain never becomes chargeable in the first place. A £5,000 profit and a £500,000 profit get identical treatment.

No wrapper needed. An ordinary dealing account gives you the same result as an ISA or a SIPP.

The route to the profit is irrelevant. Buy at £60 and hold to a £100 repayment, or buy at £60 and sell at £75 next year. Both come out exempt.

That treatment attaches to the gilt, so a gilt fund or ETF does not carry it across. Selling fund units is an ordinary disposal of an ordinary asset, and funds holding mostly bonds tend to pay income treated as interest. Owning the gilts directly is the only route to s.115 treatment.

Where the tax lands

Gilt interest counts as savings interest, taxed the way bank interest is taxed. It carries its own set of allowances, which is why the distinction from dividends matters.

Savings interest is assessed after earnings and pensions, so it effectively sits on top of them when HMRC decides which band applies. Two allowances can absorb it. People with low earned income may get the starting rate for savings first, worth up to £5,000. Then comes the Personal Savings Allowance, which gov.uk puts at £1,000 for basic rate taxpayers, £500 for higher rate and nil for additional rate.

Above those allowances your normal rate applies. Forty percent for most higher-rate taxpayers.

Only the interest channel gets taxed. Picking a gilt with a small coupon sends most of your return down the other one.

Two gilts, the same yield, a £20,000 gap

The UK ten-year gilt yield reached 5.295% on 10 September 2026, its highest since August 2007. Take that as the going rate and price two different ten-year gilts off it, so that both earn a buyer exactly 5.295% a year. Put £100,000 into each.

The low-coupon gilt pays 0.125% a year. To yield 5.295% it has to be cheap, and it prices at £60.64 per £100 nominal. Your £100,000 therefore buys £164,896 nominal.

• The coupon is charged on the nominal figure, so 0.125% of £164,896 gives you £206 a year in interest, which is taxable
• On the repayment date the government sends £164,896, which is £64,896 more than you paid, and that profit is exempt

The par gilt pays 5.295% a year, which is already the going rate, so it needs no discount and prices at £100. Your £100,000 buys £100,000 nominal.

• Here the nominal and what you paid are the same, so 5.295% of £100,000 gives you £5,295 a year in interest, all taxable
• On the repayment date the government sends back your £100,000, and there is no profit at all

Both earn 5.295% a year. Across the decade one produces £2,061 of taxable interest and the other produces £52,950.

A higher-rate taxpayer hands over £824 across ten years on the low-coupon gilt. The par gilt costs £21,180. Both earned the same return, so the £20,356 gap comes down to which one was bought.

As a rate, which sidesteps any argument about what you do with the cash along the way: a higher-rate taxpayer keeps roughly 5.23% a year from the low-coupon gilt and roughly 3.18% from the par gilt, on an identical 5.295% gross yield.

£824 is the cautious figure, too. It assumes other savings interest has already used up your Personal Savings Allowance. Where it has not, £206 a year sits inside the £500 higher-rate allowance with room to spare, and the low-coupon gilt costs nothing in tax.

What the chart leaves out

The two gilts pay out on very different timetables. £5,295 a year from the par gilt is money you can spend. The low-coupon gilt gives you £206 and holds everything else back until the repayment date.

Anyone who needs income now will find that timetable counts against the low-coupon gilt whatever the tax does. The after-tax rates above are the fairer comparison, because they price in when the money turns up. The chart tracks tax alone, which keeps it to one variable.

Where this matters most

Money sitting outside an ISA. Most people fill the ISA allowance long before they run out of money to invest. Cash and bond funds in an ordinary dealing account throw off fully taxable interest year after year. Low-coupon gilts route most of the same return through the exempt channel instead. Few assets cost so little to hold outside a wrapper.

Bridging a gap of known length. Somebody retiring at 58 who cannot touch a pension in full until later needs specific sums on specific dates. Gilts maturing in successive years do that job, with no market risk as long as each is held to repayment, and a higher-rate taxpayer keeps close to the whole gross yield. Picking the maturities is arithmetic.

Moving money into a wrapper. Shifting gilts from a dealing account into an ISA each April costs nothing in CGT, where the same move with shares often triggers a bill.

What the exemption will not do for you

Prices move before the repayment date. Hold to repayment and you collect £100 plus the yield you bought at. Sell early and you take the market price, which in a year like this one can sit a long way from where you started.

Accrued interest can be reclassified. Buying or selling part way between interest payment dates brings the accrued income rules into play, and they can treat a slice of the price as interest. Very little accrues on a low-coupon gilt, so the effect is usually small.

Index-linked gilts work differently. Their payments track inflation, which needs its own arithmetic. Everything here covers conventional fixed-coupon gilts.

The rates are changing. Savings income tax rates rise by two percentage points from April 2027, announced at Budget 2025. That widens the gap above, since it lifts the tax on interest and leaves the exempt profit untouched.

Frequently asked questions

Are gilts tax free?

Only partly. You never pay capital gains tax on a gilt, because gilts are exempt under section 115 of the Taxation of Chargeable Gains Act 1992. There is no limit on that exemption and you do not need an ISA to get it. You do pay income tax on the interest a gilt pays you, at your normal rate, once your Personal Savings Allowance is used up.

Do I pay capital gains tax on gilts?

No, never. UK government gilts are exempt from capital gains tax under TCGA 1992 section 115. It makes no difference whether you bought cheaply and held until the government repaid you, or sold at a profit beforehand. There is no cap on the size of the exempt gain, and the £3,000 annual exempt amount is not involved at all.

Are gilt funds and gilt ETFs tax free?

No. The exemption belongs to the gilt itself. A fund or ETF holding gilts on your behalf is a separate asset with its own treatment, so selling its units is an ordinary capital gains disposal. Funds holding mostly bonds also tend to pay out income treated as interest rather than dividends. If the CGT exemption is your reason for buying, you need to own the gilts directly.

Why do low-coupon gilts trade below £100?

Because the interest they pay is uncompetitive, so the price has to fall until the overall deal is worth doing. A gilt issued when rates were near zero might pay only 0.125% a year. With rates above 5%, nobody would pay £100 for that. The price drops until the small interest payments plus the rise from the low price back up to £100 at repayment add up to a competitive return.

Are gilts tax free in an ISA?

Yes, though the ISA does less for a gilt than it does for other assets. Gilt gains are already free of capital gains tax outside any wrapper, so the ISA is only sheltering the interest. On a low-coupon gilt that interest might be a couple of hundred pounds a year, which your Personal Savings Allowance may already cover. Gilts are one of the few holdings where keeping them outside an ISA costs you very little.

Why are low-coupon gilts more tax efficient?

Because only the interest gets taxed, and a low-coupon gilt pays very little interest. Two gilts bought at the same gross redemption yield earn you the same return overall, but they deliver it differently. The low-coupon one delivers most of it as a tax-free price rise, while one priced near £100 delivers most of it as taxable interest. At a 5.295% gross yield over ten years, a higher-rate taxpayer keeps about 5.23% a year from a 0.125% coupon gilt and about 3.18% from one priced at £100.

How is gilt interest taxed?

As savings interest, the same way bank interest is taxed. Dividends run under a separate set of rules and rates. Your Personal Savings Allowance covers the first £1,000 if you are a basic rate taxpayer, £500 at higher rate and nil at additional rate. People with low earned income may also have the starting rate for savings, worth up to £5,000, before that. Anything above those allowances is taxed at your normal rate.

The takeaway

Your return from a gilt arrives down two channels: the interest, and the climb from your purchase price up to £100 at repayment. Only the interest is taxed.

Picking a gilt with a small coupon sends most of the money down the untaxed channel. On the figures above that was worth around two percentage points a year to a higher-rate taxpayer, across two gilts on the same gross yield.

Unusually for UK tax, there is no allowance to budget against and no ceiling to worry about, which also leaves your ISA allowance free for something that needs it more.

Current rules are at gov.uk on tax on savings interest, and the legislation itself at TCGA 1992 s.115. Gilt prices and yields move every day, and every figure here comes from one day's yield.

This is illustrative, not financial advice. Tax rules change, personal circumstances matter, and the right answer for me may not be the right answer for you.