UK Government-backed bonds are beating many cash-based deposits
Our high-net-worth clients in the UK often ask whether it is possible to generate a higher after-tax return on their cash deposits, without taking additional risk with their capital.
The short answer is yes. It is in fact very easy to generate a higher after-tax return for such clients by investing in certain UK Government-backed bonds, also known as gilts.
As shown in the example below, the after-tax return from a short dated low coupon gilt can be a lot higher.
Many UK banks tend to offer derisory deposit rates
Many UK clients are caught out by UK banks offering a seemingly attractive headline rate of circa 4.30% gross per annum for 1 year.
However, once the client has paid UK income tax, at 45%, (the Additional Rate) they are left with a much smaller amount. This has led many clients to consider short dated (1 year to redemption) gilts.
Why are 1 year gilts so attractive?
The main attraction for a UK tax resident individual investing in gilts is that any capital gain is completely free of CGT (Capital Gains Tax).
All UK fixed rate gilts are set to redeem on their stated redemption date at £1.00 for each unit held.If we buy each unit below its redemption value of £1.00 and hold to redemption, we are guaranteed a tax-free capital gain, as shown in the table below.
| Quantity | Name | Price | Cost | Tax Free Capital Gain | Redemption Rate | Repayment Amount | Redemption Date |
| 102,774 | UK Treasury 1.25% 22/7/2027 | £0.9730 | £100k | £2,774 | £1.00 | £102,774 | 22/07/2027 |
Source: Hargreaves Lansdowne, 03/08/2026
The interest will be paid gross at 1.25% per annum.
On quantity held 102,774 = £1,284
- Less Income Tax at 45% = (£578)
Net income received = £706
Total return (Capital and Income) = £3,480 or 3.48% per annum after tax
Bank deposit – 1 year comparison
For ease of comparison, we have used a £100,000 UK deposit account which also matures on 22/07/2027, paying interest gross at 4.30% per annum.
This produces £4,300 per annum in gross income.
However, after deducting 45% for Income Tax (£1,935.00) we are left with a net after-tax return of £2,365, or 2.365% net after tax per annum.
UK short-dated gilts – the main attractions
- Highly liquid and can be sold prior to redemption on the London Stock Exchange without penalty
- Regarded as safe and secure and are rated AA by Standard & Poor’s, the major international credit rating agency.
- Can easily be turned back into cash within 24 hours.
- Long established – the market for UK gilts was first established in 1694.
- Widely used by Higher Rate and Additional Rate taxpayers in the UK for their tax efficiency.
The risks
One risk is that if in the near-term Bank of England base rates were to suddenly rise, the short-dated gilts may temporarily fall in price. However, providing you paid less than their redemption value of £1.00 for each unit held, you will still have a tax-free capital gain at the set redemption date.
Next steps
If you would like to have an initial discussion on how UK gilts can increase your after-tax return on your cash-based deposits, please contact NXD Family Office or Alan Kinnaird at Walker Crips Investment Management in York.
Important information
This article is intended to be an education piece by Walker Crips Investment Management and should not be taken as advice. It is not investment research and should not be construed as an offer or solicitation to buy, sell or trade in any of the investments, sectors or asset classes mentioned. The value of any investment and the income arising from it is not guaranteed and can fall as well as rise, so that you may not get back the amount you originally invested. Past performance is not a reliable indicator of future results. Movements in exchange rates can have an adverse effect on the value, price or income of any non-sterling denominated investment. Nothing in this document constitutes advice to undertake a transaction, and if you require professional advice you should contact your financial adviser or your usual contact at Walker Crips. Walker Crips Investment Management Limited is authorised and regulated by the Financial Conduct Authority (FRN:226344) and is a member of the London Stock Exchange. Registered office: 128 Queen Victoria Street, London, EC4V 4BJ. Registered in England and Wales number 4774117.