A Bond Fund Runs Your Gilt Portfolio for £7 a Year — Direct Gilts Are a Game for People Who Like Spreadsheets

The direct-gilts argument hinges on one fact: capital gains on individual UK gilts are not chargeable to CGT, per HMRC guidance on gov.uk. True. But the exemption only produces real money when three conditions all hold.

One, you are holding in a taxable account, not an ISA or SIPP. Two, the gilt appreciates meaningfully — which means you bought a low-coupon issue below par, specifically. Three, you would otherwise be paying CGT, which means your total gains from all sources exceed the £3,000 annual exempt amount in 2026/27.

The Bank of England Bank Rate at 3.75% and ONS CPI at 3.0% mean real yields on gilts are positive at the front end and rising at the long end. That shape rewards diversified curve exposure.

For the median UK investor with a £20,000 ISA allowance and a workplace pension, condition one fails. Nothing inside the wrappers is taxable to CGT anyway. The exemption is irrelevant.

For higher-net-worth investors with a taxable bond allocation, condition two requires you to actively hunt low-coupon gilts. The market tends not to offer many — the DMO issues most new gilts near par, and existing low-coupon stock trades at a premium because everyone else also knows about the exemption. The arbitrage is narrower in practice than it is in theory.

Let's stop pretending 0.07% is a meaningful drag on returns. iShares Core UK Gilts UCITS ETF (IGLT) manages £4.15 billion at a total expense ratio of 0.07%. Vanguard's UK Gilt UCITS ETF (VGOV) charges 0.05%. On £50,000 of gilt exposure, that is £25-35 a year.

Direct gilts have costs too. Platform dealing charges at Hargreaves Lansdown are £11.95 per trade online for shares, and while gilts are dealt via phone at around the same level, building a five-gilt ladder costs roughly £60 in commissions upfront. Spreads on less-liquid issues run wider than on the benchmark stock. And the biggest cost is the one nobody prices: your time.

Build a ladder, a gilt matures in year three, you now need to decide: buy another gilt to maintain exposure, or keep the cash? That is another trade, another £12, and another 30 minutes of your life. Skip the decision because you forgot, and your ladder quietly degrades into a shortening portfolio with no replacement at the long end. This happens constantly to DIY fixed-income investors.

A DIY ladder of five gilts gives you five concentrated points of exposure. IGLT holds over 40 gilts spanning every maturity bucket from short-dated to 50-year.

This matters more than people think. If you build a ladder with rungs at 2028, 2031, 2035, 2040 and 2048, your portfolio behaves like five specific gilts moving together in interest-rate moves — which is fine — but badly calibrated to the actual UK term structure. The fund's weighting reflects the market's judgement of how to distribute duration across the curve. Your ladder reflects whichever five gilts were convenient when you bought.

And when new gilts are issued — which happens routinely as the DMO auctions to fund government spending — the fund's index methodology picks them up automatically. Your ladder does not. You would have to actively buy them, and most DIY investors never do. Over ten years a passive ladder drifts away from being representative UK gilt exposure into being whatever-you-bought-in-2026 exposure.

A UK gilt trades in size at the DMO's auctions, but retail secondary-market liquidity in specific issues varies. Benchmark 10-year gilts are deep — spreads run a few basis points. Off-the-run gilts, especially low-coupon issues investors bought for the CGT arbitrage, have materially wider spreads when you want to sell before maturity.

IGLT trades like any LSE-listed ETF. Spreads are under a basis point during market hours. You can sell £100,000 at 11am and have the proceeds the same week, at a price you saw on screen.

Income reinvestment is also handled. Every six months the fund pays a distribution or rolls it into the NAV (depending on share class). Doing that manually with direct gilts means collecting the coupon, parking it in cash, waiting for a sensible re-entry point, and deploying it. That drag is real, and the reinvestment-risk math shows it eats a chunk of any fee savings.

For those starting out with bonds, see our savings hub and the investing hub for wrapper choices. The gilts hub shows live UK yields across the curve.

For real-world fee comparisons across platforms, see our AJ Bell review and Hargreaves Lansdown review — dealing costs matter more than OCF once you are running a meaningful-size bond allocation. The gold vs gilts debate covers when neither is the right answer.

There is a specific scenario where the direct route wins decisively: a high-earner with maxed-out ISA and SIPP allowances, sitting on £100,000+ of taxable bond exposure, who wants to hold to a known date — say, funding a house deposit in five years or a child's university fees in eight.

Here the CGT exemption is meaningful because you have taxable gains to shelter. Holding to maturity means you do not care about liquidity spreads. And a specific maturity date beats a fund's general exposure — a fund cannot promise you cash at a specific date, but a gilt redeeming in 2031 will hand you face value in 2031.

For that specific use case, direct gilts are correct. For everyone else — including most readers of this article — the £5 or £7 per £10,000 is a trivial price to pay for a bond portfolio that manages itself. The opposing argument in our direct gilts counter-argument covers when the CGT math wins big.

See our deeper analysis of high-coupon gilts and capital-loss risk for the trap that catches inexperienced ladder-builders in rising-rate environments.

If you are buying gilt exposure inside an ISA, the whole CGT-exemption argument collapses to zero. Everything in an ISA is already CGT-free. The only question is which product delivers the yield most efficiently.

The answer is a fund, every time. The 2026/27 ISA allowance is £20,000. A £20,000 gilt ladder means five £4,000 gilt positions — each one barely above the minimum sensible trade size, each one attracting a platform dealing charge. The fund gives you fractional ownership of the whole curve in a single £20,000 position, rebalanced automatically, with income reinvested if you pick the accumulating share class.

Same answer for SIPPs. The £60,000 pension annual allowance is large enough to build a ladder, but there is no tax reason to — the wrapper is already sheltered. Use the fund. Spend the time saved on something that actually compounds.

This article is for informational purposes only and does not constitute financial advice. Tax treatment depends on individual circumstances and may change. You should seek independent financial advice before making any investment decisions.