UK Gilts Direct vs Gilt ETFs (2026/27)
UK gilts direct vs gilt ETFs 2026/27: Section 115 TCGA 1992 CGT exemption on direct gilt capital gains, coupon tax treatment, low-coupon short-dated gilt strategy for high-rate taxpayers, gilt ETF (VGOV / IGLT) for diversification, index-linked vs conventional, broker access (Hargreaves Lansdown + Interactive Investor + AJ Bell).
The Section 115 TCGA 1992 CGT exemption
Direct gilts (UK government bonds) are EXEMPT from Capital Gains Tax under Section 115 TCGA 1992. This unique tax treatment makes gilts particularly attractive for higher-rate + additional-rate taxpayers + those who have used their CGT annual exempt amount (£3,000 in 2026/27). Example: 0.5% coupon 2028 gilt trading at 90p → 4% yield-to-maturity comprising 0.5% taxable coupon + 3.5% CGT-EXEMPT capital gain. After-tax yield for additional-rate taxpayer: 0.28% net coupon + 3.5% full capital gain = 3.78% vs 2.2% on equivalent savings account.
Direct gilts vs gilt ETFs side-by-side
Direct gilts
- Section 115 CGT exemption
- Choose specific maturity
- Low-coupon strategy possible
- Hold to maturity = guaranteed return
- Best for taxable accounts outside ISA
- Requires gilt research
Gilt ETFs
- Diversified across many gilts
- NO Section 115 exemption (ETFs are funds)
- Capital gains CGT-able outside ISA
- Simpler - single security
- Best inside ISA / SIPP wrapper
- 0.07-0.10% OCF typical
Related guides
- UK Fixed-Rate Bond Laddering 2026/27 - cash bond ladder alternative.
- UK NS&I Index-Linked Savings 2026/27 - inflation hedge.
- UK Personal Savings Allowance 2026/27 - coupon tax treatment.
- UK CGT Rules - context for Section 115 exemption value.
Frequently asked questions
What are gilts + why do they matter for taxpayers?
Gilts = UK government bonds, the lowest-risk fixed-income investment available to UK investors. Issued by HM Treasury via the Debt Management Office (DMO). Backed by government taxation power; effectively risk-free for default purposes. The major tax feature: Section 115 TCGA 1992 EXEMPTS capital gains on gilts from CGT. So if you buy a gilt at 90p in pound + hold to maturity at 100p, the 10p gain is CGT-EXEMPT. This unique tax treatment makes gilts particularly attractive for higher-rate + additional-rate taxpayers seeking after-tax yield.
How is gilt income (coupons) taxed?
Coupons are taxable as savings income (interest) at your marginal Income Tax rate, subject to Personal Savings Allowance. So a 4% gilt held outside Individual Savings Account (ISA): PSA covers first £1k (basic) / £500 (higher) / £0 (additional) of total annual savings interest. Above PSA, marginal rate applies. Strategy: HIGH-RATE taxpayers prefer LOW-COUPON gilts (small taxable coupon, big tax-free capital gain at maturity). LOW-RATE taxpayers can take higher-coupon gilts for the steady income. Inside ISA / SIPP: both coupon + capital gain are tax-free regardless.
What's the "low-coupon short-dated gilt" strategy?
A specific tax-efficient strategy for higher-rate + additional-rate taxpayers. Buy gilts trading SIGNIFICANTLY BELOW par (typically because they have low coupons relative to current market rates) with 1-5 year maturity. Example: a 0.5% coupon 2028 gilt trading at 90p might offer a yield-to-maturity of 4%, comprised of 0.5% taxable coupon + 3.5% CGT-exempt capital gain. For a 45% additional-rate taxpayer: 0.5% taxable coupon = 0.28% after-tax; 3.5% CGT-exempt gain = full 3.5%. Total ~3.78% after-tax yield vs 2.2% on a 4% savings account after 45% tax. Material outperformance. Best gilts for this strategy: yieldgimp.com publishes tax-equivalent yields.
How do I buy gilts directly?
Three main routes. (1) Investment platforms: Hargreaves Lansdown, AJ Bell, Interactive Investor, Charles Stanley Direct. All offer gilt purchase via Share Dealing accounts (typically £5-£11.95 per trade). HL is most user-friendly for beginners; II is cheapest for active gilt trading. (2) Direct from DMO: gilts are auctioned by DMO; retail investors typically buy on the secondary market via platforms. (3) "Approved Persons" intermediaries: full-service stockbrokers (Charles Stanley, Killik) - higher fees but advisory service. For most retail investors: HL or II + buy on secondary market.
What about gilt ETFs?
Diversified exposure to gilt market via single security. Major UK gilt ETFs: VGOV (Vanguard UK Gilt UCITS ETF, 0.07% OCF), IGLT (iShares Core UK Gilts UCITS ETF, 0.07% OCF), IGLN (iShares Core UK Gilts 0-5yr UCITS ETF, 0.07% OCF). Trade-off: Pros: diversification across many gilts of different maturities, simpler than direct gilt selection, fully tradeable. Cons: NO Section 115 CGT exemption applies to ETFs (they're UCITS funds, not direct gilts). Capital gains on ETFs subject to CGT outside ISA. Coupons received by ETF + paid to investors as distributions taxed as savings income. Most efficient: hold gilt ETFs inside ISA / SIPP to eliminate tax entirely.
Direct gilts vs gilt ETFs - which is better?
Depends on situation. Direct gilts outside ISA: Section 115 CGT exemption is the killer feature for higher / additional-rate taxpayers. Specific gilt selection matters; need to research yields + maturities. Gilt ETFs inside ISA / SIPP: simpler + diversified + tax-free anyway via ISA wrapper. Best for general fixed-income exposure as part of a portfolio. Hybrid: many savvy investors hold direct gilts outside ISA (for the CGT exemption tax benefit) + diversified gilt ETF inside ISA / SIPP. Captures both the tax efficiency + diversification.
What about Index-Linked Gilts?
Same Section 115 CGT exemption + inflation protection. The principal + coupons are uplifted by RPI (the "linkers"). Important: same tax treatment - coupons taxable as savings income subject to PSA + marginal rate; capital gains CGT-exempt. The RPI uplift to principal at maturity is treated as part of the capital gain - CGT-exempt. Currently the best inflation-protected savings option for UK retail (since NS&I Index-Linked Savings Certificates are closed). Available via brokers + via the iShares Index-Linked Gilts ETF (INXG, 0.10% OCF) for diversified exposure.
What's the duration risk?
Bond prices move INVERSELY to interest rate changes. Longer duration = larger price moves. A 10-year gilt with 5% modified duration: 1% interest rate rise = ~5% price fall (short term). Held to maturity: full par value + capital gain locked in. Risk: if you need to sell before maturity + rates have risen, you take a capital loss. For tax planning: pick maturity matching your hold horizon. For income: ladder maturities. For aggressive yield capture: longer-dated gilts have higher yields but more interest rate risk. Most retail investors: 1-5 year duration sweet spot.