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Low Coupon Gilts - still a smart option for today’s investor?

Steve Willerton · Posted on: October 29th 2025 · read

With interest rates easing and market volatility back in focus, many investors are reassessing how best to balance security and tax efficiency in their portfolios.

Low coupon UK government bonds - or “gilts” - have been popular in recent years for their stable returns and favourable tax treatment, particularly for higher and additional-rate taxpayers.

Yet with changing market conditions and heightened uncertainty around the UK’s fiscal outlook, it is worth examining whether investing in low coupon gilts remains as compelling as it once was.

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What are low coupon gilts?

Low coupon gilts are UK government bonds issued during periods of low interest rates, typically offering annual coupons below 1%.

Examples include the 0.125% Treasury Gilt 2026 and 0.5% Treasury Gilt 2029. These gilts trade below their £100 face value on the secondary market, meaning investors can buy them at a discount and receive full repayment at par value on their fixed maturity date.

Key attributes

Tax Efficiency

One of the most compelling reasons to invest in low coupon gilts is their exemption from Capital Gains Tax (CGT). When purchased below par and held to maturity, the capital uplift, often the bulk of the return, is entirely tax-free. This makes them particularly attractive for higher-rate or additional-rate taxpayers who may have exhausted their ISA or pension allowances.

Predictable Returns

Despite offering low income, these gilts provide a known yield-to-maturity.

For example, a gilt trading at £96 and maturing at £100 in one year delivers an 4.2% capital gain, plus a small coupon. The effective gross yield can rival or exceed that of taxed savings accounts, especially for those in higher tax brackets.

With maturity dates also fixed, these investments can be used for liability matching, enabling investors to use them to plan for known events such as the payment of a tax bill, or school fees.

Low Volatility

Short-dated (generally up to 5-year maturities) low coupon gilts have low duration, meaning they are less sensitive to interest rate changes. As they approach maturity, their price tends to “pull to par,” offering a stable and predictable return profile. This can make them ideal for cautious investors seeking capital preservation.

"In a high-yield, high-volatility environment, short-dated low coupon gilts offer a rare combination of security, predictability, and tax efficiency."

Steve Willerton, Director

Market Dynamics in 2025

The surge in demand for low coupon gilts has been notable. Some of the large retail investor platforms have reported record-breaking inflows, with short-dated gilts dominating purchases. However, supply is tightening - £80 billion worth of low coupon gilts are set to mature in early 2025, reducing availability and potentially pushing prices higher.

A further factor of late has been intensifying concerns over the UK government's finances, which have cast a shadow over the gilt market. Long-term borrowing costs have surged, with 30-year gilt yields reaching their highest levels since 1998, driven by investor anxiety about rising fiscal deficits, inflationary pressures, and the scale of debt issuance ahead of the November budget.

By focusing on short-dated low duration gilts, the effects of this market volatility will be minimised for investors, with the risks of default by the UK government still very low in our view.

In a high-yield, high-volatility environment, short-dated low coupon gilts offer a rare combination of security, predictability, and tax efficiency - qualities that remain valuable even as market dynamics shift.

For wealth managers and individual investors alike, they represent a smart alternative to cash and traditional savings products, especially when held to maturity. As availability tightens, strategic selection and careful timing will be key to maximizing their benefits.

MHA Wealth can help

To understand how low coupon gilts could fit within your investment portfolio, and before making any investment decisions, it is always advisable to seek professional advice.

Please get in touch with your usual MHA financial adviser or contact our wealth team for assistance.

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Important information

MHA Wealth is the trading name of MHA Wealth Ltd, a company registered in England (1916615) with registered office at The Pinnacle, 150 Midsummer Boulevard, Milton Keynes, MK9 1LZ. MHA Wealth is authorised and regulated by the Financial Conduct Authority (FCA) with registered number 143715 and is a member of the London Stock Exchange. MHA Wealth is a member of the MHA group. Further information on the MHA group can be found at https://www.mha.co.uk/details-of-mha-uk-entities.

This is a marketing communication for general information only, and is not intended to be individual investment advice, a recommendation, tax, or legal advice. The views expressed in this article are those of MHA Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk.

This information represents our understanding at the time of publication of current law and HM Revenue & Customs practice. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. You are therefore recommended to seek professional regulated advice before taking any action.