A gilt is a bond issued by the UK government to borrow money from investors. The name comes from the gilt-edged certificates originally used to represent the debt, and it stuck as shorthand for any UK government bond. Gilts are considered one of the lowest-risk investments available because they’re backed by the full creditworthiness of the British government. They pay interest twice a year and return your original investment when they mature.
How Gilts Work
When you buy a gilt, you’re lending money to the UK government. In return, the government promises to pay you a fixed amount of interest, called a coupon, every six months until the gilt matures. On the maturity date, you get back the face value of the gilt (the principal) along with the final coupon payment.
Gilts are priced per £100 of face value. If you buy a gilt with a 3% coupon at face value, you’ll receive £1.50 every six months for each £100 you hold. The coupon rate is typically set to reflect market interest rates at the time the gilt is first issued.
You don’t have to hold a gilt until maturity. Gilts trade on the secondary market, and their prices move up and down based on changes in interest rates, inflation expectations, and demand. If interest rates rise after you buy a gilt, its market price will generally fall, because newer gilts offer higher coupons. The reverse is also true: falling interest rates tend to push existing gilt prices higher. This only matters if you sell before maturity. If you hold to the end, you receive exactly the coupon payments and principal you were promised.
Conventional Gilts vs. Index-Linked Gilts
The UK government issues two main types of gilts, and the difference between them comes down to how they handle inflation.
Conventional gilts pay a fixed coupon that never changes. If you buy a conventional gilt with a 4% coupon, you’ll receive that same 4% of face value each year (split into two payments) regardless of what happens to inflation. This makes them predictable but vulnerable to purchasing-power erosion. If inflation runs higher than your coupon rate, your real return is negative.
Index-linked gilts adjust both the coupon payments and the principal repayment in line with the UK Retail Prices Index (RPI). The coupon on an index-linked gilt looks small, often around 0.5% to 2%, but the actual cash you receive grows as inflation accumulates. On the maturity date, you get back your principal adjusted for all the RPI inflation that occurred since the gilt was first issued, plus the final inflation-adjusted coupon.
There’s a catch with index-linked gilts: the RPI can go down as well as up. If the UK experiences deflation, your coupon payments and principal repayment could shrink. The inflation adjustment also operates with a lag, meaning the payments reflect price levels from a few months earlier rather than in real time.
How Gilt Yields Work
You’ll often see gilts discussed in terms of their yield rather than their price. The yield represents the annual return you’d earn if you bought the gilt at its current market price and held it to maturity. It accounts for the coupon payments you’ll receive plus any gain or loss from the difference between what you paid and the £100 face value you’ll get back at maturity.
When a gilt trades above £100, the yield is lower than the coupon rate, because you’re paying a premium that won’t be fully returned at maturity. When it trades below £100, the yield is higher than the coupon rate. This is why gilt yields move in the opposite direction of gilt prices: as prices rise, yields fall, and vice versa.
Gilt yields matter well beyond the bond market itself. They serve as a benchmark for mortgage rates, corporate borrowing costs, and pension fund valuations across the UK. When gilt yields spike, borrowing gets more expensive throughout the economy.
Tax Treatment for Individual Investors
Gilts carry a notable tax advantage for UK investors. Capital gains on gilts are exempt from Capital Gains Tax under section 115 of the Taxation of Chargeable Gains Act 1992. That means if you buy a gilt at £95 and sell it at £100 (or hold it to maturity and receive £100 back), the £5 gain is tax-free.
Interest income from gilts, however, is subject to Income Tax. The coupon payments you receive count as savings income and are taxed at your marginal rate. Depending on your total income, you may be able to shelter some or all of that interest under the Personal Savings Allowance.
How to Buy Gilts
Individual investors can buy gilts on the secondary market through a stockbroker, a bank, or the DMO’s Purchase and Sale Service, which is operated by Computershare Investor Services. The Purchase and Sale Service also maintains the official register of gilt holdings.
You can also gain exposure to gilts through funds. Gilt funds and exchange-traded funds (ETFs) hold baskets of gilts with varying maturities, which can be simpler than selecting and managing individual bonds yourself. The trade-off is that a fund never “matures” the way a single gilt does. You’re always exposed to price fluctuations unless you sell.
If you prefer to buy individual gilts, you’ll want to consider the maturity date (short-term gilts mature in a few years, long-term gilts can run 30 years or more), the coupon rate, and the current yield relative to other options like savings accounts or fixed-rate bonds. Holding a gilt to maturity eliminates price risk entirely, making gilts especially appealing when you want a guaranteed return over a specific time horizon.
Why Gilts Matter in a Portfolio
Gilts play a specific role in investment portfolios: they provide stability and predictable income. Because the UK government has never defaulted on its gilt obligations, they’re treated as essentially risk-free in sterling terms. That makes them useful as ballast against riskier holdings like equities.
Pension funds are among the largest holders of gilts because the predictable cash flows help them match future liabilities. For individual investors, gilts can serve a similar purpose: locking in a known return over a set period, whether that’s two years or twenty. The right choice between conventional and index-linked gilts depends largely on whether you’re more concerned about locking in a fixed income stream or protecting your purchasing power against inflation.