Why low coupon gilts are tax efficient

Q: What does the difference look like in numbers?

Illustration only. The figures are invented to show the mechanics and are not a forecast of any gilt's price or yield. A higher rate taxpayer whose £500 Personal Savings Allowance is already used by other interest has £9,500 to invest for two years in 2026 to 2027 and the following year, and assumes 40% tax throughout for simplicity. Low coupon giltSavings account Purchase or deposit£10,000 nominal bought for £9,500£9,500 deposited Interest over two years£100 (0.5% coupon on £10,000)£600 Gain on redemption£500, exemptNone Total pre tax return£600£600 Income tax at 40%£40£240 Return after tax£560£360 The pre tax returns are identical, but the gilt keeps £200 more because only £100 of its return is taxable. Had the higher savings rates applied to the second year, the gap would widen slightly.

Q: Which gilts do not get this treatment?

Gilt strips. A strip is a separated coupon or principal payment with no interest of its own. Although CG54900 says strips count as gilts for Capital Gains Tax, it also says strips held by individuals are treated as deeply discounted securities, so the growth in value is taxed as income. SAIM3130 adds that strips are revalued every 5 April and the increase taxed each year. Gilts held through a fund. A gilt fund or bond fund is not itself a gilt. HMRC's Investment Funds Manual at IFM03370 says a disposal of units in an authorised investment fund may give rise to a Capital Gains Tax charge, and income from such a fund may be paid as interest. See bond funds paying interest distributions. Gilts held by companies. Companies are taxed on gilts under the loan relationship rules rather than this exemption; SAIM2450 notes that companies buying or selling securities are taxed under the loan relationships legislation.

Q: What are the common mistakes?

Claiming a loss. Section 16(2) TCGA 1992 applies the rules that make a gain not chargeable to make the matching loss not allowable. If a gilt is sold below cost before redemption, there is no capital loss to set against other gains. Forgetting the coupon is paid gross. Because tax is normally not deducted (section 893 ITA 2007), coupons above your allowances must be reported. GOV.UK says savings interest above £10,000 a year must be reported on a Self Assessment return. Confusing gilts with corporate bonds. Qualifying corporate bonds are also exempt under section 115, but a corporate bond issued at a deep discount is taxed as income. The definitions are compared in gilts and qualifying corporate bonds. Overlooking an ISA. GOV.UK confirms interest on savings held in an ISA is not taxed, so where ISA allowance is available a higher coupon gilt inside the ISA may compare differently. The ISA rules are in ISA tax rules. The tax treatment is only one part of the decision. Gilt prices move with interest rates before redemption, and the exemption gives no protection against a fall in value if you need to sell early. If HMRC opens a check into your return, tax investigation insurance pays your accountant's fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

A gilt’s return comes in two parts: the coupon, which is taxable interest, and any rise in price up to redemption, which is exempt from Capital Gains Tax under section 115 of the Taxation of Chargeable Gains Act 1992. A gilt with a low coupon bought below its £100 redemption value delivers most of its return as that exempt gain, so a higher rate saver keeps far more than from a savings account paying the same total return as interest.

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Where does the return on a gilt come from?

A gilt is UK government loan stock. It pays interest, the coupon, on its nominal or face value, and repays that nominal value on the redemption date. HMRC’s helpsheet HS343 explains that the nominal value is the face value on which interest is calculated.

Gilts issued when interest rates were very low carry coupons well below current market rates. To give a buyer a market return, they trade at a price below £100 per £100 nominal. A buyer who holds to redemption therefore gets a small coupon each year plus the difference between the purchase price and £100 at the end. The lower the coupon, the more of the total return comes from that pull to par.

How is each part taxed?

The coupon is taxable interest

Gilt interest is taxed as savings income. Section 893 of the Income Tax Act 2007 makes interest on gilt edged securities payable gross unless the holder has made a deduction at source application to the Registrar under section 895, so in most cases you receive the coupon without tax taken off and must account for any tax due. Tax is charged on the full amount of interest arising in the tax year (section 370 of the Income Tax (Trading and Other Income) Act 2005).

The coupon can be covered by your unused Personal Allowance, the starting rate for savings and the Personal Savings Allowance. For 2026 to 2027, GOV.UK gives the Personal Savings Allowance as £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and nil for additional rate taxpayers. Interest above the allowances is taxed at your normal rate.

The gain to redemption is exempt

Section 115(1)(a) TCGA 1992 provides that a gain accruing on the disposal by any person of gilt edged securities is not a chargeable gain. HMRC’s Capital Gains Manual at CG54900 confirms that all disposals of gilt edged securities since 2 July 1986 have been exempt. Redemption is a disposal, so the uplift to £100 is tax free, as is any profit on selling before redemption.

The gain is not caught by the income tax rules for discounted bonds either. Section 432 ITTOIA 2005 states that gilt edged securities that are not strips are not deeply discounted securities, and HMRC’s manual at SAIM2230 confirms that profits on sales of gilts are not charged under an income regime. Compare this with corporate bonds issued at a deep discount, covered in deeply discounted securities, where the whole discount is taxed as income.

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Why does this suit higher rate savers in particular?

For 2026 to 2027 a higher rate taxpayer pays 40% on interest above a £500 Personal Savings Allowance, and an additional rate taxpayer pays 45% with no allowance. Capital Gains Tax is charged at 24% for higher and additional rate taxpayers above an annual exempt amount of £3,000, according to GOV.UK. A gilt gain avoids both: it is not income and not a chargeable gain, so it uses none of the Personal Savings Allowance and none of the annual exempt amount.

The gap widens from 6 April 2027. HM Treasury’s policy paper confirms that savings income will be taxed at 22%, 42% and 47% for 2027 to 2028, across the whole UK. Coupon income will bear the higher rates; the exempt gain will not. See savings income tax rates from April 2027.

A basic rate taxpayer with modest savings often has enough Personal Savings Allowance to cover ordinary interest, so the advantage is smaller.

What does the difference look like in numbers?

Illustration only. The figures are invented to show the mechanics and are not a forecast of any gilt’s price or yield.

A higher rate taxpayer whose £500 Personal Savings Allowance is already used by other interest has £9,500 to invest for two years in 2026 to 2027 and the following year, and assumes 40% tax throughout for simplicity.

	Low coupon gilt	Savings account
Purchase or deposit	£10,000 nominal bought for £9,500	£9,500 deposited
Interest over two years	£100 (0.5% coupon on £10,000)	£600
Gain on redemption	£500, exempt	None
Total pre tax return	£600	£600
Income tax at 40%	£40	£240
Return after tax	£560	£360

The pre tax returns are identical, but the gilt keeps £200 more because only £100 of its return is taxable. Had the higher savings rates applied to the second year, the gap would widen slightly.

Does the Accrued Income Scheme change the picture?

When a gilt is bought between coupon dates, the price includes interest that has built up since the last coupon. HS343 explains that under the Accrued Income Scheme a seller is taxed on that accrued interest as an “accrued income profit”, while a buyer can deduct the amount paid for it as an “accrued income loss” from the next coupon received. In a buy and hold strategy this mainly affects the first coupon, reducing the taxable amount.

HS343 also sets out an exemption for small holdings. The scheme does not apply to an individual if the total nominal value of all securities held did not exceed £5,000 at any time in the tax year or the previous tax year. Above that level, it applies to any transfer however small. Accrued income profits and the coupon are reported together in box 3 on page Ai 1 of the Additional information pages, according to HMRC’s SA101 notes.

The scheme adjusts timing of interest between buyer and seller. It does not turn the exempt gain into income.

Which gilts do not get this treatment?

Gilt strips. A strip is a separated coupon or principal payment with no interest of its own. Although CG54900 says strips count as gilts for Capital Gains Tax, it also says strips held by individuals are treated as deeply discounted securities, so the growth in value is taxed as income. SAIM3130 adds that strips are revalued every 5 April and the increase taxed each year.
Gilts held through a fund. A gilt fund or bond fund is not itself a gilt. HMRC’s Investment Funds Manual at IFM03370 says a disposal of units in an authorised investment fund may give rise to a Capital Gains Tax charge, and income from such a fund may be paid as interest. See bond funds paying interest distributions.
Gilts held by companies. Companies are taxed on gilts under the loan relationship rules rather than this exemption; SAIM2450 notes that companies buying or selling securities are taxed under the loan relationships legislation.

What are the common mistakes?

Claiming a loss. Section 16(2) TCGA 1992 applies the rules that make a gain not chargeable to make the matching loss not allowable. If a gilt is sold below cost before redemption, there is no capital loss to set against other gains.
Forgetting the coupon is paid gross. Because tax is normally not deducted (section 893 ITA 2007), coupons above your allowances must be reported. GOV.UK says savings interest above £10,000 a year must be reported on a Self Assessment return.
Confusing gilts with corporate bonds. Qualifying corporate bonds are also exempt under section 115, but a corporate bond issued at a deep discount is taxed as income. The definitions are compared in gilts and qualifying corporate bonds.
Overlooking an ISA. GOV.UK confirms interest on savings held in an ISA is not taxed, so where ISA allowance is available a higher coupon gilt inside the ISA may compare differently. The ISA rules are in ISA tax rules.

The tax treatment is only one part of the decision. Gilt prices move with interest rates before redemption, and the exemption gives no protection against a fall in value if you need to sell early.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.