No Capital Gains on UK Government Bonds for Investors

Investing in UK government bonds, also known as gilts, can be a safe and stable way to grow your wealth.

In the UK, investors are exempt from paying capital gains tax on the sale of gilts, which means you won't have to worry about paying tax on any profits you make from selling your bonds.

This is a major advantage of investing in gilts, as it means you get to keep all of your gains without having to pay a penny in tax.

One of the most significant advantages of UK government bonds, also known as gilts, is that they are exempt from capital gains tax.

For all investors, the capital gain portion is tax-free with gilts, which means you won't have to pay capital gains tax on any profits from selling a gilt or when it matures.

Most investors will pay income tax on the coupon, but in some circumstances, you might not even be liable for income tax on the coupon.

Here are the tax benefits of gilts:

If you sell your gilt before it matures for less than you paid for it, you can't set that loss against capital gains made elsewhere, so it's essential to consider this before investing.

If you're an active investor, it's essential to consider the return profile of gilts when buying them for tactical reasons.

The way capital gains tax on individual gilts works is that there is none, which means you might want to hold them outside of tax shelters.

This leaves more room in your ISAs and SIPP for your tax-liable stuff, making them a good option for filling your allowances.

If you buy very short-term gilts, you could see a tax-free capital gain that is better than the taxed income you'd get with normal cash savings.

However, if you struggle to fill your ISAs and SIPP, it's best to buy your gilts inside tax shelters, where they are safe from income tax too.

Individual gilts are capital gains tax-free, but gilt funds are a different matter and are liable for capital gains tax.

The interest you get from your coupon counts as savings income, so it's worth minimising the income coupon and maximising the tax-free capital gain.

Gilts are considered one of the safest investment options because the British government fully backs them.

Investors receive regular interest payments in return for lending money to the UK government, with most gilts offering a fixed cash payment every six months until maturity.

The interest payments are like an IOU from the Treasury, providing a steady stream of income for investors.

Gilts are entirely exempt from Capital Gains Tax (CGT), which means there's no CGT to pay on any profits from selling a gilt or when it matures.

This exemption is especially beneficial for higher rate taxpayers who'd otherwise have to pay a 20% CGT.

A gilt's redemption value is the amount you get back when it's redeemed, which can be higher or lower than the original investment depending on market conditions.

For example, the Treasury 0.125% 2039 gilt had a par value of £100 but cost £80 to buy in October 2022, resulting in a £20 capital gain when it matured.

Suggestion: List of Government Bonds

Gilts provide a safer alternative during uncertain times, and their low correlation with stock markets makes them an alternative diversifier.

By including gilts in a diversified portfolio, investors can mitigate risk and balance their exposure to different asset classes.

The coupon is fixed at the outset, providing a predictable income stream for investors.

HMRC updates a list of gilt-edged securities exempt from Capital Gains Tax each time a Treasury Order specifies further exempt gilts.

This list includes titles of gilt-edged securities with a redemption date on or after 1 January 1992.

Investors can check this list to see which gilts are exempt from CGT.

Additional reading: What Is Government Bonds and Securities

Income from gilts is subject to Income Tax, which means you'll need to declare the interest payments you receive on your tax return.

The amount of tax you pay will depend on your overall income, which could place you in a basic, higher, or additional rate tax bracket.