Gilts rarely make headlines for the right reasons. They surface when yields spike, when the Bank of England is active in the market, or when a pension scheme is in the news. The rest of the time they sit quietly in the background, doing a fairly simple job: paying interest to whoever lends the UK government money. For individual investors, gilts can serve two purposes — a source of predictable income, and a brake on the swings elsewhere in your portfolio. Both only work if you understand how prices and yields interact.
What a gilt actually is
A gilt is a bond issued by the UK government, through the Debt Management Office on behalf of HM Treasury. You are lending money to the state in return for interest, known as the coupon, and the promise of your money back on a set date. Because the borrower is the UK government, gilts carry very low credit risk — they are widely treated as the closest thing to a risk-free sterling asset.
Most gilts are conventional: a fixed coupon paid twice a year, and a fixed redemption date. They carry names like "Treasury 4% 2031", which tells you the coupon and the year the loan matures. A smaller group are index-linked, where the coupon and the redemption value rise with inflation.
Coupons, prices and yields
This is where many investors lose their footing. The coupon is fixed when the gilt is issued. What changes daily is the price, because gilts trade on the London Stock Exchange like shares.
Prices are quoted per £100 of nominal value. If a gilt trades at £95, you pay £95 for every £100 of government debt you hold, and you still receive £100 back at maturity. That difference matters, because it means your actual return is not the coupon — it is the yield to maturity, which folds in the coupon, the price you paid, and the time remaining.
Suppose a gilt with five years left has a 4% coupon and trades at £95. You collect £4 a year per £100 nominal, plus a £5 gain spread over five years. Your yield to maturity is therefore a little above 4%. If the price fell to £88, that gain would be larger and the yield would rise. Hence the rule that trips people up: when gilt prices fall, yields rise — and vice versa. Neither is good or bad on its own; it depends on whether you are buying or selling.
One practical detail: if you buy between coupon dates, you pay accrued interest on top of the quoted price. The quoted figure is the "clean" price; what leaves your account is the "dirty" price. It is not a hidden charge, and you receive it back at the next coupon payment.
Index-linked gilts and inflation
Conventional gilts have a weakness: inflation erodes the spending power of a fixed coupon. Index-linked gilts address that by adjusting both interest payments and the eventual redemption value in line with an inflation index. They are quoted and priced differently, and their yields are real yields — the return above inflation. They have historically been in strong demand from pension funds, which can make them look expensive, and in some periods they have traded on negative real yields. Useful for matching a future inflation-linked need; less useful as a straightforward income holding.
Why UK investors hold them
- Income you can plan around. A coupon paid twice a year, on a known date, is easier to budget with than dividends that move with profits.
- Stability. High-quality government bonds tend to fall less than shares in a serious market sell-off, and sometimes rise as investors seek safety.
- A known maturity date. If you need £20,000 in 2030, a gilt maturing in 2030 does that job precisely. A fund does not, because it never matures.
- Tax treatment. Gilt interest is paid gross but is taxable as savings income. Capital gains on gilts are exempt from UK capital gains tax for individuals. Tax rules can change, so check your own position.
The risks worth knowing
Credit risk is minimal, but other risks are real. The biggest is interest rate risk: if yields rise, the price of your gilt falls, and the longer the time to maturity, the more violent the move. A gilt maturing in two years barely flinches; one maturing in forty can swing by double-digit percentages. That is duration in practice.
There is also inflation risk on conventional gilts, and reinvestment risk — the coupons you receive may have to be reinvested at lower rates. If you hold a gilt fund rather than individual bonds, remember the fund has no maturity date and no guaranteed return of capital, however convenient it is.
How to buy gilts
- Open or use an account with a broker or investment platform that offers gilts; many let you hold them inside an ISA or SIPP.
- Decide whether you want conventional or index-linked, and match the maturity date to when you actually need the money.
- Check the yield to maturity, not just the coupon — a low coupon bought at a discount can pay more than a high coupon bought at a premium.
- Compare dealing charges and the bid-offer spread, which matter more on smaller trades.
- If you intend to hold to maturity, ignore the interim price movements. If you might sell early, size the position accordingly.
Fitting gilts into your portfolio
Think of gilts as the part of your portfolio with a job other than growth. Short-dated gilts can hold money you will need within a few years, where a cash account pays little and shares are too volatile. Longer-dated gilts suit investors who want a dependable income stream and can tolerate price swings in the meantime. Index-linked gilts make sense where a specific future cost is likely to rise with inflation.
Most investors do not need a large allocation. A sensible starting point is to ask what the money is for and when you need it, then buy the gilt that matches that date, rather than the one with the highest headline yield. Keep the rest of the portfolio focused on growth, and review the mix as your plans change. If your circumstances are complicated — a large portfolio, tax wrappers, or retirement income planning — a regulated financial adviser is worth the fee.
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