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Types of gilts in the UK

Types of gilts in the UK
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Gilts may sound like pieces of medieval armour, but they are actually one of the oldest forms of investments available in the UK. I’m going to explain everything you need to know about different types of UK gilts and what kind of gilt yields you can expect from these rock-solid investments.

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Keep in mind that tax rules can change, and the value of any benefits depends on your personal circumstances.

What is a gilt?

The more formal name for gilts is actually ‘gilt-edged securities’.

Essentially, a gilt is a bond issued by the Debt Management Office. For the most part, these bonds are issued as a way for the UK government to borrow money to finance its budget deficits.

By purchasing a gilt, you are lending money to the government. You buy the issued gilt and then they pay you back the initial principal plus some interest.

The most compelling thing about gilts is that they are an extremely low-risk investment. The British government has never failed to pay back the principal or interest for any gilts issued.

How do gilts work?

Gilts are issued with a par value, a redemption date, and a coupon.

Par value

The par value is the amount repayable on redemption. This figure is usually the same as the purchase price. Sometimes this is also referred to as the face or nominal value.

If gilts are bought on a second-hand market, the price could be more or less than the par value.

Redemption date

The redemption date is simply the date on which the government commits to pay back the loan.

Redemption dates usually range between five and 30 years. There were a number of 50-year gilts issued in 2005, and these are ingeniously referred to as ‘ultra-long’ gilts.


Gilts pay a fixed rate of interest each year during the life of the gilt. This is known as the coupon (not to be confused with a promo code!).

The coupon is paid without tax deducted, but it is taxable as interest.

Are all gilts the same?

The majority of gilts follow a conventional structure, but there are some variations.

Index-linked gilts are the main alternative.

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Keep in mind that tax rules can change, and the value of any benefits depends on your personal circumstances.

It’s also possible to purchase gilt strips. A gilt strip is just a deconstructed version where the interest coupon and underlying principal can be separated to be bought and sold.

What is the expected return for a gilt?

UK gilt yields and returns can vary widely depending on when the gilt was issued and the terms of the gilt.

The longer the term of the gilt, the higher the yield tends to be. This is because technically you’re taking on more risk.

The coupon rate for gilts ranges from around 0.5% to 8% depending on the value and redemption date.

Gilt markets

Gilts can be sold before their redemption date and this is partly what helps to create an active second-hand market for UK gilts.

Any gains from gilts sold during their term are actually exempt from capital gains tax. This makes them a desirable investment to trade.

The liquid nature of gilts as an investment means the gilt market operates in a similar way to the stock market.

Benefits of investing in UK gilts

As I mentioned, one of the key benefits of gilts is that they are a very low-risk investment.

Alongside this, gilts are sometimes preferable over fixed-rate bonds because they can be sold before the redemption date without a penalty.

Another key benefit is the exemption from capital gains tax, although this won’t really affect you if you are buying them using a stocks and shares ISA.

Where to invest in gilts

As an individual investor, it’s more likely that you’ll invest in gilts using funds like unit trusts and ETFs rather than buying them directly from the Debt Management Office.

This means that it’s important that you have a share dealing account with access to a wide range of funds. Using gilts as part of your investment portfolio can be an excellent diversification tool. They act as a sturdy counterpart to stocks and shares.

Using one of our top-rated share dealing accounts means you can invest in funds including gilts at a low cost. Their exemption from capital gains tax means that they can also be a great additional investment if you’ve maxed out the yearly allowance in your stocks and shares ISA.

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*Affiliate Partner. Important information and risk disclaimer: The value of shares and any income produced can fall as well as rise, and you may get back less than you invest. Exchange rate fluctuations can reduce the sterling value of any overseas holdings.

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