Imagine this: a well-thought-out reduction in inheritance tax could be just the remedy that stabilizes the economy. However, given the current stance of Rachel Reeves, it seems unlikely that such a proposal will ever cross her mind.
Are you currently investing in UK gilts? If so, we want to hear your thoughts! Feel free to reach out via email at money@telegraph.co.uk.
Several years ago, our team at Telegraph Money began highlighting how average, everyday investors have stealthily stumbled upon a profitable avenue by purchasing government debt.
The concept is straightforward. By acquiring British government bonds, commonly known as gilts, which are often available at prices lower than their original issue value, investors can hold onto them until maturity.
Since the British government has yet to default on its obligations, there is a high degree of assurance that investors will receive the full face value of the bond at maturity. Quite clever, isn’t it?
Additionally, there’s an appealing aspect: due to specific tax regulations, profits earned from the sale of gilts are exempt from capital gains tax. Investors can also choose to hold these bonds within tax-efficient accounts like ISAs (Individual Savings Accounts) or SIPPs (Self-Invested Personal Pensions). With the decreasing allowances for pensions and ISAs, this option is becoming increasingly attractive for those seeking tax-free returns.
A growing number of individuals have recognized this advantageous strategy—many of whom seem to be Telegraph readers based on the correspondence I’ve received. The Bank of England has taken notice of this trend as well.
In a blog entry authored by staff members from various market divisions at the central bank, they referred to this phenomenon as a "global trend."
The post elaborated that, although bond yields—the interest rates that the government pays on its debt—have stabilized since the tumultuous period following the mini-Budget in 2022, the demand from retail investors remains robust.
While retail investors currently own about four percent of all outstanding gilts, the authors noted that the rate of increase in their participation has been quite significant.
But what if individual investors like you and me started to play a much larger role in the gilt market? This shift could greatly benefit the Chancellor, who is always seeking ways to reduce borrowing costs, as well as the Bank of England itself.
Recently, Governor Andrew Bailey cautioned Members of Parliament that hedge funds have come to "dominate" the trading within Britain’s £3 trillion gilt market. He explained that while the additional liquidity provided by these traders supports government borrowing, it also poses risks to financial stability.
James Sproule, the chief economist at Handelsbanken UK, recently articulated that relying heavily on such investors is akin to being "dependent on the goodwill of others," echoing a sentiment shared by his predecessor, Mark Carney.
As Sproule pointed out, many of these investors may not remain committed to the UK amidst the inevitable fluctuations in the financial markets, and many operate at high levels of leverage. Consequently, even minor shifts in the UK’s economic landscape can lead to exaggerated reactions from these funds, resulting in more volatile investment behaviors compared to retail investors like ourselves.
Encouraging more domestic investors to participate in purchasing our national debt makes perfect sense. Not only would this stabilize the ownership of our debt, but it would also foster a culture of saving.
Simon French, the chief economist at Panmure Gordon and a notable thinker in this arena, has proposed that the government should consider making these gilt investments exempt from inheritance tax in order to attract even greater investment. He argues that while the government might initially face lower revenue from death duties, the resulting surge in demand for gilts would lead to reduced borrowing costs.
"We would be surprised if this idea wasn’t already under serious consideration," he remarked last month.
"It’s conceivable that a Budget announcement in mid-2026 could justify such a proposal as a way to incentivize broader domestic ownership of gilts."
Sadly, Rachel Reeves’ track record as Chancellor thus far does not indicate she is inclined to entertain—or even contemplate—such a wise initiative.
Even a gesture like reducing inheritance tax that ultimately finances additional government spending would likely attract criticism from the left wing of her party, which is already poised to challenge her leadership.
In the meantime, if you’re interested in joining the ranks of amateur gilt investors, you can find a detailed guide here.
