Many UK investors hold very short-dated, low-coupon gilts partly for tax reasons.
Why:
“I buy a gilt at, say, £96, collect a tiny coupon, then get £100 back at maturity. The gain is tax-free; only the small coupon is taxable.”
In this post, we’ll look at how that logic can be used.
Important: This is general education, not personal tax advice. Always check current rules and your own situation.
1. The core tax idea
For individuals:
- Coupons from gilts are taxed as savings interest (unless held in ISA/SIPP)
- Capital gains on gilts are generally exempt from Capital Gains Tax
That’s why low-coupon gilts trading below £100 are interesting:
- The coupons are tiny → low taxable income
- The return comes mainly from the gilt drifting up towards £100 at maturity → capital uplift, usually CGT-free
So if you’ve already used your Personal Savings Allowance, but have room to take capital uplift, low-coupon gilts can be attractive compared with:
- High-interest deposits (fully taxable)
- High-coupon bonds (more interest to declare)
2. The tax-aware short-end strategy
Many investors currently:
- Sit in 2025–2027 gilts with low coupons
- Accept yields in the low-to-mid 3% area
- Enjoy a nice mix of safety + tax-efficient uplift
This works, but it leaves you heavily exposed to reinvestment risk:
- If yields fall, when your 2026 gilt matures you may have to reinvest at much lower rates.
3. Extending the idea further along the curve
The same tax logic can apply to gilts maturing in:
- 2028–2032
- Or even 2035+, if your time horizon allows
You look for:
- Low coupons – 0.125%, 0.25%, 0.5%, 1.0%
- Prices below £100 – ideally with a reasonable discount
- YTM that beats what you’d realistically get on after-tax cash
Pros:
- You lock in a higher yield for longer
- You still keep taxable interest low
- A bigger portion of your return is tax-free capital uplift
Cons:
- Longer gilts will move around more in price
- Your money is committed for longer, unless you’re happy to sell before maturity (at a gain or loss)
- You need to be comfortable with the risk that rates could rise, making the price fall in the short term
4. Three practical structures for tax-sensitive investors
Here are three ways to put it together, using what we’ve already covered.
A. “Short–Medium” ladder with low coupons
- Keep 1–2 years’ spending in cash / ultra-short gilts
- Build a ladder from (say) 2026 to 2034 using mainly low-coupon gilts below £100
Effect:
- You nudge your average YTM up
- Maintain regular maturities
- Keep interest income modest, with most of the return arriving via tax-free capital uplift
B. Tax-barbell: cash + long low-coupon gilts
For investors comfortable with some volatility:
- Keep a large cash buffer (for near-term spending and emergencies)
- Use a chunk of capital in longer low-coupon gilts (e.g. 2030–2038) with higher YTMs
Here:
- Cash is your stability
- Long gilts are your yield engine and potential capital-gain play if rates fall
- Taxable interest stays reasonably low thanks to the small coupons
C. Rolling low-coupon strategy
If your main goal is to minimise taxable interest:
- Hold a set of low-coupon Gilts with staggered maturities
- As each one matures, roll into the best-value low-coupon gilt then available, potentially slightly further out the curve if the extra yield is worth it
- Keep an eye on:
- YTM vs cash
- Your total interest income across all accounts
- Any changes to tax allowances
5. Things to watch out for
A few common pitfalls to avoid:
- Ignoring YTM
- A low coupon doesn’t automatically mean a good deal.
- Always compare YTM vs other options, net of tax.
- Going too long for comfort
- Don’t extend so far that you’d panic if your gilt pot is down 10–15% on screen.
- Match maturities to your real-world time horizon.
- Concentrating everything in gilts
- Gilts can be a great low-risk anchor, but they’re still just one asset class.
- For long-term growth you usually still want equities in the mix.
- Forgetting ISA/SIPP shelters
- Inside an ISA or SIPP, the tax game is different: coupons and gains are sheltered.
- That may change whether you care about low vs high coupons.
6. Bringing it all together
Across the three posts, the basic message is:
- Learn to read the gilt tables (especially YTM)
- Use that to build a ladder that fits your time horizon and risk tolerance
- For tax-sensitive money, look at low-coupon gilts below £100 where much of your return comes from tax-free capital uplift, potentially by extending modestly along the yield curve for better YTMs
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