The UK gilts definition is simple: gilts are UK government bonds, a way the government borrows money from investors and repays it with interest over time. They matter now because gilt prices and gilt yields influence everything from government borrowing costs to pension funding, and they can move quickly when interest-rate expectations change.
What are UK gilts? A clear definition
A gilt is a UK government liability issued by HM Treasury, denominated in sterling, and listed on the London Stock Exchange.
In plain English: when you buy a gilt, you are lending money to the UK government. In return, you typically receive:
- Coupon payments (interest) during the life of the bond, and
- Your principal (the face value) back at maturity.
The House of Commons Library describes gilts as a loan the government borrows from investors, promising repayment with interest, while noting that gilts can be traded and their value can change.
Why they’re called “gilt-edged”
The Debt Management Office (DMO) notes the term “gilt” (or “gilt-edged security”) reflects their perceived security, highlighting that the UK government has historically met interest and principal payments as they fall due.
Background and UK context: who issues gilts and why
The UK government issues gilts to help finance public spending and manage the public finances. The DMO (part of HM Treasury’s debt management function) supports gilt issuance and the gilt market.
Gilts are also central to the wider UK financial system because they are widely held by:
- Pension funds and insurers (for long-term liabilities), and
- Global investors seeking sterling assets.
The Commons Library notes the overall gilt stock represents most of the UK government’s total debt and gave a snapshot figure of £2.6 trillion (mid-December 2024).
Why gilts matter to everyday UK investors
Even if you never buy a gilt directly, gilts can affect you through:
- Pension performance: many pension schemes hold gilts for stability and liability matching.
- Mortgage and savings pricing: gilt yields are a key reference point in market interest rates (especially longer-term funding costs).
- Budget headlines: higher gilt yields can raise the government’s borrowing costs, influencing fiscal choices.
For retail investors, gilts can be attractive when you want:
- a known maturity date,
- predictable interest payments (for conventional gilts), and
- typically lower credit risk than corporate bonds.
Explain UK gilts: types you’ll see in the UK market
UK gilts come in several forms. The labels can sound technical, but the differences are practical.
1) Conventional gilts
These pay a fixed coupon, usually in two instalments per year, and repay a fixed principal at maturity. Hargreaves Lansdown notes that most gilts pay coupons twice a year.
2) Index-linked gilts
These are designed to offer inflation protection by linking payments (and the redemption amount) to inflation measures, so cashflows adjust over time. (The details vary by issue.)
3) Short-, medium- and long-dated gilts
Gilts are often grouped by maturity:
- short-dated (near-term maturity),
- medium-dated, and
- long-dated (many years to maturity).
The longer the maturity, the more the price can swing when interest-rate expectations move.
4) “Undated” gilts (rare today)
Some legacy gilts have no fixed maturity date (less common in modern portfolios and markets).
UK gilt yields explained (for dummies): what a “yield” actually is
A yield is the return you expect from a bond, expressed as an annual percentage. For gilts, there are a few common “yield” ideas you’ll see:
Coupon vs yield (don’t confuse them)
- Coupon = the fixed interest rate on the bond’s face value (e.g., a 2% coupon on £100 pays £2 a year, typically split into two payments).
- Yield = the return based on the price you pay for the bond today.
If a gilt’s price rises, its yield tends to fall. If the price falls, the yield tends to rise. That’s why bond headlines often talk about yields moving inversely to prices.
Yield to maturity (YTM): the most useful number
Yield to maturity is a market estimate of the annual return you’d get if you hold the gilt to maturity, assuming coupons are paid as scheduled and you reinvest them at that rate.
Why yields move
Gilt yields tend to move with:
- expectations for Bank of England interest rates,
- inflation expectations, and
- supply/demand for UK government debt.
The Bank of England also publishes terminology and concepts around yield curves, reinforcing that a yield curve shows yields across maturities and is a core market concept.
How gilt prices work: a simple pricing walkthrough
Gilt prices are commonly quoted per £100 nominal. If a gilt is priced at £95, you are paying £95 for £100 of face value (ignoring accrued interest for the moment). At maturity, you typically receive £100 back, so part of your return can come from that capital uplift.
Two key points retail investors often miss:
1) Accrued interest affects what you pay
When you buy a gilt between coupon dates, you usually pay the seller the interest that has built up since the last coupon payment. HL explains you’ll need to pay the accrued interest to the seller as part of the trade.
2) Dealing costs can matter
HL notes that trading bonds/gilts typically involves dealing commission, and some gilts may only be tradable by phone on certain platforms.
How much are UK gilts? What investors typically mean
“How much are gilts?” can mean three different things:
1) The price of a specific gilt
Prices vary by issue, maturity and coupon. Some gilts trade above £100 (a premium); others below (a discount). Market prices move daily.
2) The minimum investment
Retail platforms typically allow you to buy gilts in small sizes (often per £100 nominal or similar lot sizes), but minimums depend on the broker/platform.
3) The expected return (yield)
This depends on the gilt’s current price and time to maturity. Many platforms display yields alongside prices.
If you want reliable sources for prices, the ICAEW research guide points to places investors often use (including the DMO and financial market sources) and restates the official definition of gilts as HM Treasury liabilities listed on the LSE.
Benefits and risks of gilt investing
Gilts can look “safe”, but they are not risk-free. Here’s a balanced view.
Benefits
- Low credit risk (relative): UK government-backed debt is generally considered low default risk.
- Defined maturity: if held to maturity, you know when principal is due (for conventional gilts).
- Portfolio diversification: gilts can behave differently from shares, especially in risk-off periods.
- Potential tax efficiency (in some cases): gilts can be exempt from UK capital gains tax in many circumstances (see tax section).
Risks
- Interest-rate risk: if yields rise, gilt prices can fall—especially long-dated gilts.
- Inflation risk: fixed-coupon gilts can lose purchasing power if inflation stays high (index-linked gilts address this differently).
- Reinvestment risk: if you rely on coupons, future reinvestment rates may be lower.
- Liquidity and pricing spreads: some gilts trade more actively than others; costs and spreads vary by platform.
Real-world UK examples: why gilts can move sharply
When market expectations for interest rates shift, gilts can reprice fast. A common pattern:
- Investors expect rates to stay higher for longer → yields rise → gilt prices fall.
- Investors expect cuts sooner → yields fall → gilt prices rise.
This matters most for long-dated gilts, where a small yield change can mean a large price move (duration effect).
Step-by-step: how to buy gilts in the UK
There are two main routes: direct gilts or funds.
Option A: Buy gilts directly (via a broker/investment platform)
- Open an account (e.g., investment account, ISA, or SIPP).
- Select the gilt by maturity/coupon (or filter by yield).
- Check the dealing costs and whether online dealing is available. Some trades may require a phone deal.
- Understand accrued interest (what you pay upfront may include accrued).
- Decide your plan:
- hold to maturity (focus on yield-to-maturity), or
- trade (more sensitive to price swings and costs).
When direct gilts can make sense:
- you want a specific maturity date (e.g., to fund school fees in 3 years), or
- you want a known set of cashflows (coupon schedule).
Option B: Buy gilt exposure through a fund/ETF
- Choose a gilt fund by maturity profile (short, intermediate, long).
- Pay attention to the fund’s duration and costs.
- Remember: fund units don’t “mature” like a single gilt; the fund constantly rolls holdings.
When funds can make sense:
- you want diversification across many gilts, and
- you prefer easier dealing and smaller position sizing.
Pros & cons: direct gilts vs gilt funds
Direct gilts
Pros
- Clear maturity date and redemption value (for conventional gilts)
- You can tailor maturities to your needs
- Potential CGT advantages for many gilts
Cons
- You must pick individual issues
- Dealing costs and liquidity vary
- Concentration risk if you buy only one or two gilts
Gilt funds/ETFs
Pros
- Diversification across multiple gilts
- Easy to buy/sell like other funds
- Useful for broad exposure without security selection
Cons
- No fixed maturity (you may not “get your £100 back” at a known date)
- Ongoing fees
- Performance can be volatile, especially in long-duration funds
UK gilts analysis of bond investments: what professionals watch
If you’re analysing gilts like a newsroom (or like a portfolio manager), focus on these drivers:
- Bank of England policy path: expectations for Bank Rate tend to move yields across the curve.
- Inflation trends: higher expected inflation usually pushes yields higher.
- Fiscal outlook and issuance: how much debt the government needs to issue, and market appetite for it.
- Curve shape: whether short yields are above long yields (inversion), or long yields are higher (normal curve).
The Bank of England’s yield curve material is useful background for how yield curves are described and interpreted in official UK statistics.
Table: UK gilt types and what they’re typically used for
| Gilt type | What it pays | Main advantage | Key risk to understand | Typical UK use-case |
|---|---|---|---|---|
| Conventional (fixed coupon) | Fixed coupons + fixed redemption | Predictable cashflows | Inflation and interest-rate risk | Income planning, maturity matching |
| Index-linked | Inflation-linked cashflows (structure varies) | Helps protect purchasing power | Complex pricing; sensitive to real yields | Long-term inflation hedging |
| Short-dated | Near-term maturity | Lower price volatility (usually) | Lower yield in some environments | Parking cash for known dates |
| Long-dated | Long maturity | Higher sensitivity to rate cuts (can rise strongly if yields fall) | High volatility if yields rise | Pension matching; long-horizon investors |
Tax and regulation basics: what UK investors should know
Tax can change outcomes materially, so it’s worth getting the basics right.
Capital gains: many gilts are CGT-exempt
HMRC publishes a list of gilt-edged securities that are exempt from tax on chargeable gains under relevant legislation.
HMRC’s internal manual also states that disposals of gilt-edged securities have been exempt from Capital Gains Tax since 2 July 1986 (subject to the rules and definitions).
Practical implication:
If you buy a gilt at a discount to £100 and hold to maturity, the capital uplift may be CGT-exempt (depending on the specific gilt and your circumstances). However, always verify with official guidance or professional advice if you’re investing significant sums.
Income tax: coupon interest may be taxable outside wrappers
While capital gains can be exempt for many gilts, coupon interest is generally treated as income outside tax wrappers. Holding gilts inside an ISA or SIPP can change the tax treatment.
(If you’re unsure, use HMRC guidance and consider regulated advice for larger portfolios.)
Useful Tips Section
- Start with your time horizon: short-dated gilts are usually less volatile than long-dated gilts.
- Don’t judge return by coupon alone: a low-coupon gilt can still offer an attractive yield if it trades at a discount.
- Watch accrued interest when buying: your upfront cost can be higher than the quoted clean price because of accrued interest.
- Use wrappers where appropriate: ISAs and SIPPs can simplify tax, especially if you’re building a long-term allocation.
- Avoid over-concentrating: one gilt is still a single instrument; consider laddering maturities if you’re using gilts for planned spending.
FAQ
1) UK gilts definition: What exactly is a gilt?
A gilt is a UK government bond sterling-denominated debt issued by HM Treasury and listed on the London Stock Exchange.
2) Explain UK gilts in simple terms
Buying a gilt means lending money to the UK government. You typically receive interest (coupon payments) and then get your principal back when the gilt matures.
3) UK gilt yields explained: why do yields rise when prices fall?
Because yield reflects the return based on today’s price. If a bond’s fixed cash flows are bought at a lower price, the implied return is higher, so yields rise as prices fall.
4) How much are UK gilts?
It depends on the specific gilt’s market price (often quoted per £100 nominal), the size you buy, and your broker’s dealing rules and costs. Prices and yields can change daily.
5) How do I buy gilts as a retail investor in the UK?
Typically, through a broker or investment platform (in an investment account, ISA, or SIPP). Some platforms allow online trading for certain gilts, while others may require dealing by phone, and you may pay accrued interest as part of the trade.
6) Are gilts safe investments?
Gilts are often considered lower credit risk because they are backed by the UK government, but they can still lose value if yields rise, especially for long-dated gilts.
7) Are UK gilts tax-free?
Many gilts are exempt from UK Capital Gains Tax on disposal (subject to the relevant rules and qualifying issues), but coupon interest may still be taxed as income outside wrappers like ISAs/SIPPs.
8) What does “UK gilt yields explained for dummies” usually miss?
The big missing point is the coupon ≠ yield. The coupon is fixed, but the yield changes every day with the gilt’s market price, and that’s why gilt prices can be volatile.
Conclusion
UK gilts definition boils down to UK government bonds, sterling debt issued by HM Treasury, and supported by the gilt market infrastructure overseen by the DMO.
For investors, the crucial concepts are how gilt prices and yields move in opposite directions, how maturity affects volatility, and how dealing mechanics like accrued interest can change your upfront cost.
What to watch next is the broader rate and inflation backdrop: expectations for Bank of England policy and inflation data often drive the biggest day-to-day moves in gilt yields and prices, particularly at the long end of the curve.
