Gains on gilts are exempt from capital gains tax, while their coupons are taxed as savings income (GOV.UK). A low-coupon gilt priced below £100 therefore delivers most of its return as a tax-free rise to £100 at maturity and only a small part as taxable interest. For a higher or additional-rate taxpayer holding gilts outside an ISA or pension, that can mean an after-tax yield far above a high-coupon gilt with the same gross yield, as the worked example below shows.
The rules that make it work
- Gains are exempt. A gain on the disposal of gilt-edged securities “shall not be a chargeable gain” (Taxation of Chargeable Gains Act 1992, section 115). GOV.UK lists UK government gilts among the assets you do not pay capital gains tax on, and HMRC keeps the list of exempt stocks, last updated on 30 July 2026 (HMRC).
- The discount is not taxed as income. Gilt-edged securities, other than strips, are excluded from the deeply discounted securities rules (ITTOIA 2005, section 432), which can tax the discount on some other bonds as income.
- Coupons are savings income. Above the Personal Savings Allowance of £1,000 for basic-rate, £500 for higher-rate and nothing for additional-rate taxpayers (GOV.UK), coupons are taxed at 20%, 40% or 45% in 2026 to 2027 and at 22%, 42% or 47% from 6 April 2027, across the UK (HMRC).
- Losses do not count either. Because gains are exempt, a loss on a gilt is not an allowable loss (TCGA 1992, section 16).
Why some gilts trade well below £100
A gilt’s coupon is fixed when it is first issued, so gilts issued in years of low yields carry small coupons. When yields rise, existing gilts fall in price, because price and yield move in opposite directions (DMO). A gilt with a small coupon then trades below £100, and the pull back to £100 as maturity approaches supplies most of its return. That pull is the part the tax system leaves alone, and it is why low-coupon gilts appeal to taxpayers who hold gilts outside an ISA or pension.
A worked example, with hypothetical numbers
The two gilts below are invented to show the mechanics; they are not current prices. Both have three years to maturity and are bought on a coupon date, so there is no accrued interest, and held to maturity. For simplicity each pays one coupon a year (real gilts pay two, which changes the decimals, not the point). We ignore dealing costs, assume the buyer’s Personal Savings Allowance is already used by other interest, and apply 2027 to 2028 tax rates throughout.
| Per £10,000 invested | Gilt A: 0.5% coupon | Gilt B: 4.5% coupon |
|---|---|---|
| Price per £100 nominal | £90.50 | £101.62 |
| Nominal bought | £11,049.72 | £9,840.58 |
| Coupon each year | £55.25 | £442.83 |
| Gain or loss at maturity | Gain of £1,049.72, tax-free | Loss of £159.42, not allowable |
| Gross yield to maturity | 3.92% | 3.92% |
Before tax, the two are identical. After tax they are not, because all of Gilt B’s return comes from taxable coupons, which also have to make up for a small loss at maturity, while most of Gilt A’s comes from an exempt gain.
| Savings tax rate, 2027 to 2028 | Gilt A after tax | Gilt B after tax | Fully taxed savings rate needed to match Gilt A |
|---|---|---|---|
| No tax due | 3.92% | 3.92% | 3.92% |
| Basic rate, 22% | 3.80% | 2.94% | 4.87% |
| Higher rate, 42% | 3.69% | 2.05% | 6.37% |
| Additional rate, 47% | 3.67% | 1.83% | 6.92% |
A higher-rate taxpayer keeps 3.69% a year from Gilt A and 2.05% from Gilt B. To match Gilt A, a savings account whose interest is fully taxed at 42% would need to pay 6.37% gross. At the 2026 to 2027 rates of 20%, 40% and 45%, Gilt B would keep 3.03%, 2.14% and 1.91%, and Gilt A 3.81%, 3.70% and 3.68%: the gap is slightly narrower, but the pattern is the same.
Where the Personal Savings Allowance fits
The table assumes the allowance is already used. For some basic-rate taxpayers it will not be: on the example above, Gilt B’s £442.83 of coupons would fit inside a £1,000 allowance if there were no other interest, so no tax would be due on either gilt and both would yield 3.92%. The low-coupon effect therefore matters most to people whose other savings interest already uses up the allowance, to higher-rate taxpayers with only £500 of allowance, and to additional-rate taxpayers, who have none. From 6 April 2027 the two-point rise in savings tax rates widens the gap a little further.
What the Bank of England’s staff found
Writing on the Bank’s staff blog on 15 January 2026, Bank of England economists estimated that retail investors hold less than 4% of all gilts in issue, and that over 80% of estimated retail holdings sit within the bottom quartile of available coupon rates (Bank Underground). They explain the pattern by tax: capital gains on gilts are exempt while coupons are subject to income tax for retail investors, which “results in a mechanically higher after-tax yield” than higher-coupon gilts. Holdings are concentrated in gilts maturing within three years.
The authors also found that retail holdings of middle and high-coupon gilts had grown over the previous three years, possibly because the coupons are tax-free inside an ISA or pension, and that growth in demand slowed through 2025 as short-dated yields edged lower. The views are the authors’ own rather than the Bank’s.
The catches
- Price before maturity. The tax-free gain is only locked in if you hold to the end. Sell early and you get the market price, which may be lower than you paid, and the loss cannot be set against other gains.
- Inflation. A conventional gilt pays fixed sums, so rising prices erode what they buy. Index-linked gilts work differently; see inflation and index-linked gilts.
- The Accrued Income Scheme. If the nominal value of your securities exceeds £5,000 on any day in the tax year or the year before, accrued interest on purchases and sales is adjusted through your taxable income (HMRC, HS343).
- Wrappers change the answer. Inside an ISA or pension, coupons and gains are both tax-free, so the low-coupon advantage disappears and the gross yield is the figure to compare.
- Reinvestment. The money comes back at maturity and has to go somewhere at the rates then available.
- Costs. Spreads and commission cut the yield, and the cut is larger on short holdings.
How to run the comparison yourself
- From the quote, take the gross yield to maturity, the coupon and the clean price.
- Work out the running yield: coupon divided by clean price. For Gilt A that is 0.5 ÷ 90.50, or 0.55%.
- Multiply the running yield by your savings tax rate to estimate the yearly tax drag: 0.55% × 42% is about 0.23 points.
- Subtract it from the gross yield: 3.92% less 0.23 points gives about 3.69% after tax.
- To compare with a savings account whose interest is fully taxed, divide by one minus your tax rate: 3.69% ÷ 0.58 is about 6.36%, or 6.37% on the unrounded figures in the table.
The shortcut is close enough for a first comparison. For buying decisions, work from the actual cash flows and dates. Our guide to how to buy gilts covers prices and costs, gilts or a savings account sets the after-tax yield against fixed-rate deposits, and bonds explained covers duration and price risk.
