Are gilts taxed differently from corporate bonds in the UK?

Full answer

The key tax difference between gilts (UK government bonds) and corporate bonds lies in how capital gains are treated, which matters most to higher-rate investors holding bonds outside an ISA or pension. Gilts are specifically exempt from Capital Gains Tax: if you buy a low-coupon gilt below par and hold it to redemption at GBP 100, the price uplift is entirely tax-free, escaping the 18%/24% CGT rates and not even using your GBP 3,000 annual exempt amount. This makes low-coupon, short-dated gilts attractive to higher and additional-rate taxpayers, because most of the return comes as a tax-free capital gain rather than taxable income. The coupon (interest) on gilts is still taxable as savings income at 20%, 40% or 45%, subject to your Personal Savings Allowance. Corporate bonds split into two groups. Most standard sterling corporate bonds are 'qualifying corporate bonds' (QCBs) and are also exempt from CGT, so capital gains on them are tax-free too; their interest is again taxed as income. Non-qualifying corporate bonds - for example some convertible or foreign-currency bonds - are not exempt, so gains can fall within CGT at 18%/24% after the GBP 3,000 allowance. Worked example: a higher-rate investor buys a gilt at GBP 90 and redeems at GBP 100. The GBP 10 per GBP 100 nominal gain is tax-free; only the coupon is taxed. The same gain on a non-qualifying bond could cost up to 24% CGT. A 2026/27 point: with the dividend allowance cut to GBP 500 and CGT exempt amount only GBP 3,000, the gilt CGT exemption is increasingly valuable for sheltering returns. Holding either bond type inside an ISA or pension removes income tax on the coupon as well. Use the capital gains and income tax calculators below to compare net returns.

Try the calculator