Gilts are bonds issued by the UK government, and they sit at the centre of the sterling financial system. This article explains how a gilt pays its holder, why the price paid changes the return, and where the main tax point sits.
What is a gilt, exactly?
According to the UK Debt Management Office (DMO), gilts are sterling-denominated liabilities of the UK Government, issued by HM Treasury and listed on the London Stock Exchange. The name “gilt-edged” reflects their perceived security: the DMO says the British Government has never failed to make interest payments or principal payments on gilts as they fall due.
A gilt is, in effect, a loan from the investor to the government. In return, the government promises a stream of payments and then repays the loan on a fixed date. The details of those promises are what separate one gilt from another, and they are printed in the gilt’s name, for example “1½% Treasury Gilt 2047”.
How does a conventional gilt pay its holder?
Conventional gilts are the simplest type and, according to the DMO, make up the largest share of gilts in issue. Each one promises a fixed cash payment, called a coupon, every six months until the maturity date. At maturity the holder also receives the principal.
The percentage in the name is the annual coupon per £100 nominal, the face value on which payments are calculated. The DMO’s own illustration is a holder of £1,000 nominal of 1½% Treasury Gilt 2047, who receives two coupon payments of £7.50 each year, on 22 January and 22 July, with final maturity on 22 July 2047.
The arithmetic is straightforward:
- 1½% of £1,000 nominal is £15 a year.
- Paid in two equal instalments, that is £7.50 each.
The coupon is set when the gilt is first issued and usually reflects market interest rates at that time. It does not change afterwards, which is why such bonds are called fixed-income securities.
Why does the price paid change the return?
Coupons are fixed, but the market price of a gilt is not. After issue, gilts trade in the secondary market, and their prices move up and down. The DMO notes that prices can differ from the £100 face value and change over time.
That matters because the holder always receives £100 per £100 nominal at maturity, whatever they paid. Buying below £100 builds in a capital gain if the gilt is held to maturity; buying above £100 builds in a capital loss. The yield to maturity captures both the coupons and that gain or loss.
The DMO gives a worked example using a 3¼% Treasury Gilt 2033 bought in April 2023:
| Price paid per £100 nominal | Gain or loss if held to maturity | Yield to maturity (DMO) |
|---|---|---|
| £90 | £10 gain | about 4.53% |
| £100 | none | 3.25% (equal to the coupon) |
| £110 | £10 loss | about 2.11% |
The coupon is identical in every row. Only the price changed, and with it the return.
A worked example in pounds
Illustrative arithmetic helps make this concrete. Take £1,000 nominal of a gilt with a 3¼% coupon. The annual coupon is £32.50, paid as two instalments of £16.25.
- Bought at £100 per £100 nominal: the cost is £1,000, and £1,000 is returned at maturity. The return comes entirely from coupons.
- Bought at £90: the cost is £900. At maturity £1,000 is returned, so £100 of the return is the redemption gain, on top of the coupons.
- Bought at £110: the cost is £1,100. At maturity £1,000 is returned, so there is a £100 redemption loss that the coupons have to make up before the holder is ahead.
These figures ignore dealing costs and tax, and the real-world calculation of yield also reflects the timing of each payment. They show the mechanism, not a forecast of what any particular gilt will return.
What happens to the price when interest rates move?
The link between prices and market rates follows from the fixed coupon. If new gilts are issued with higher coupons, an older gilt paying a lower coupon becomes less attractive, and its price has to fall until its yield is competitive. If market rates fall, the reverse applies. This is why a gilt held to maturity can behave very differently from one sold part-way through its life.
For holders who sell early, the price on the day can be above or below what they paid. For holders who stay until maturity, the redemption amount is known in advance, which is the point of the table above. The wider consequences for borrowers are covered in why gilt yields matter to everyday borrowers.
How do index-linked gilts differ?
Index-linked gilts are a minority of gilts in issue. According to the DMO, their coupons and principal are adjusted for UK Retail Prices Index (RPI) inflation, with a lag, so the payments can rise or fall. The UK issued its first index-linked gilt in 1981, and an example is the 0⅛% Index-linked Treasury Gilt 2039.
The low coupon in that name can be misleading. The coupon is applied to an inflation-adjusted principal, so the cash paid is not fixed in the way a conventional gilt’s is. This makes index-linked gilts a tool for holders who care about the purchasing power of what they receive, rather than a simpler version of the conventional kind.
Are gains on gilts taxed?
On gains, GOV.UK lists gains on UK government gilts and Premium Bonds among the assets on which Capital Gains Tax is not paid. That means a price gain made by buying below £100 and selling or holding to redemption falls outside Capital Gains Tax.
That is a point about gains only. Coupons are a separate stream of income, and the GOV.UK pages on the Personal Savings Allowance, which is £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and £0 for additional-rate taxpayers, do not themselves say how gilt interest is treated. Anyone holding gilts outside a tax wrapper should check how the coupons are taxed for their own circumstances. The wider picture of what is taxed and what is not is set out in how tax works on investments outside an ISA.
How can investors buy gilts?
The DMO says the secondary market can be accessed through a stockbroker, a bank or the DMO’s Purchase and Sale Service. Only members of the DMO’s Approved Group of Investors can use that service, which is administered by Computershare Investor Services PLC. Neither the DMO nor Computershare offers investment advice.
Many investors instead hold gilts indirectly through funds, which changes the risk: a fund does not mature on a fixed date, so its value does not converge on a known redemption amount the way a single gilt’s does. How gilts fit alongside other holdings is a question of how diversification actually works.
Why the details of a gilt matter
A gilt is one of the more transparent investments available: a stated coupon, a stated maturity and a redemption value fixed in advance. What varies is the price paid and, for index-linked issues, the inflation adjustment. Reading the name of a gilt, comparing the price with £100 and understanding the yield to maturity turns a seemingly opaque product into simple arithmetic.
Security of payment is not the same as security of value. A gilt sold before maturity can fetch less than was paid for it, and inflation can erode what fixed payments buy.
This is general information, not personalised financial advice. The value of investments can fall as well as rise, and rules and rates change.
Sources: UK Debt Management Office; GOV.UK
