Glossary · UK
What is Gilt Taxation?
The UK tax treatment of government bonds (gilts), under which any capital gain on disposal is exempt from Capital Gains Tax, while interest ("coupon") payments are taxable as savings income.
Full Definition
Gilts are bonds issued by the UK government to fund its borrowing, paying a fixed rate of interest (the "coupon") twice a year until the gilt matures, at which point the government repays the face value (the "nominal" or "par" value) to whoever holds it. Gilts receive a notably favourable tax treatment compared with most other investments: any capital gain made on selling a gilt before maturity, or on the difference between the purchase price and the par value received at maturity, is entirely exempt from Capital Gains Tax, regardless of how large the gain is or how long the gilt was held. This CGT exemption makes low-coupon gilts trading below their par value (known as "low-coupon" or discounted gilts) particularly attractive to higher and additional-rate taxpayers, since the built-in gain as the price rises towards par value at maturity is tax-free, whereas the taxable coupon income is deliberately kept low. An investor buying a gilt at, say, 92 pounds per 100 pounds nominal, and holding it to maturity to receive the full 100 pounds, would realise an 8 pound tax-free gain per 100 pounds nominal, in addition to whatever (taxable) coupon was paid along the way -- a structure some investors use deliberately to manage their tax position, particularly where other tax-efficient wrappers such as ISAs and pensions are already fully used. Coupon interest received on gilts is taxable as savings income under Income Tax in the normal way, sheltered where applicable by the Personal Savings Allowance (1,000 pounds for basic-rate taxpayers, 500 pounds for higher-rate taxpayers, and nil for additional-rate taxpayers) and the 0% starting rate for savings for those with low other income. Gilts can also be held within an ISA or pension wrapper, in which case both the coupon and any gain are fully tax-free regardless of the investor's other income. Because the CGT exemption applies specifically to gilts (and qualifying corporate bonds), rather than bonds generally, investors should check that a bond is genuinely a UK gilt, rather than a corporate bond or overseas government bond with different tax treatment, before relying on the exemption.