Gaelic Warrior, trained by Willie Mullins, went off as the 11-4 joint favourite alongside Jango Baie, but outclassed the field after making the turn for home.
Jockey Paul Townend barely had to move on the impressive winner, who crossed the finish line eight lengths clear of Jango Baie.
The 2025 Gold Cup winner Inothewayurthinkin finished strongly to come third in this year's edition, having been priced at 8-1.
Mullins was full of praise for owner Rich Ricci, who became the first owner to win the Champion Hurdle - with Lossiemouth on Tuesday - and Gold Cup in the same year.
The trainer told ITV: "What a performance and what a performance from the owner.
"The first time an owner has won the Champion Hurdle and the Gold Cup in the same season.
"Paul Townend, how cool was he over the last two fences?
"I don't know how he was so cool over those last two fences. The dominance of Gaelic Warrior against a good field on paper - fantastic for them all."
Winning jockey Townend said after the race he was "fortunate" to be riding Gaelic Warrior, having been due to ride two-time Gold Cup winner Galopin Des Champs before his withdrawal.
"It's the Gold Cup. They just get better and better. I am speechless," Townend said.
"Patrick [Mullins] was convinced [Gaelic Warrior] was the horse for the race.
"Hard luck on him, but he did a lot of work with this horse. It's a big team effort. I was just fortunate to be on the back of him today.
"I got the position I wanted. I didn't ever envision going so far ahead, but I wasn't going to slow him down third from the last."
Ricci said he had "reached the mountain" having wanted to win the Gold Cup for 21 years.
Meanwhile, Envoi Allen - a three-time Cheltenham Festival winner - died after falling ill following Friday's feature race.
Big-price winners continued on the fourth and final day of the Festival as 50-1 shot Apolon De Charnie finished in front of 6-1 Maestro Conti in the Triumph Hurdle.
Champion trainer Mullins was without a winner on day three, but started day four in fine fashion.
Mullins told BBC Radio 5 Live: "Only 50-1? Last year was 100-1 [with Poniros] - so disappointing.
"That was the biggest thrill of it, Patrick [Mullins, his son] riding it. I was trying to watch all the others. Every time I was watching for Patrick, one way or the other.
"Every time I was happy when I looked at him, then he came through. What I loved was the horse's attitude when he hit the front and the Cheltenham roar.
"He galloped on up through the roar. He is very brave and he is very good."
The Jonjo O'Neill-trained 14-1 chance Wilful stormed over the line in the County Hurdle, ridden by his son Jonjo Jr.
The younger O'Neill told ITV: "I've had quite a troubled year on and off the track.
"I've had a lot of support from my mum and dad and brother and to repay them with a win like this means everything."
Mullins claimed his second winner on Friday when 11-8 favourite Dinoblue eased to her second consecutive victory in the Mares' Chase.
Jockey Mark Walsh said the "good ground" suited his horse, telling ITV: "That's proper good ground. She loves fast ground and that was ideal for her."
In the Novices' Hurdle, Johnny's Jury (20-1) was guided to the win by jockey Gavin Sheehan.
