Imagine a world where a clever reduction in inheritance tax could provide much-needed stability to our financial landscape. Yet, it's clear that Reeves will never entertain such a notion.
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A few years back, Telegraph Money highlighted how everyday small investors discovered a hidden gem by purchasing the country's debt. The concept is quite straightforward: acquire British government bonds, commonly referred to as gilts, which usually trade below their original issue price (known as "par"), and hold these bonds until they reach maturity.
Since the UK government has never defaulted on its debts, there’s a very high likelihood that you will receive back the full face value of the bond when it matures. This is a pretty attractive scenario, wouldn’t you agree?
What makes this even more appealing is a unique feature of the tax rules: any profit earned from selling a gilt is exempt from capital gains tax. Investors can also keep these bonds within an Individual Savings Account (Isa) or a Self-Invested Personal Pension (Sipp). As the allowances for pensions and Isas diminish, this option becomes increasingly appealing for those seeking avenues for tax-free earnings.
A growing number of individuals have caught on to this clever investment strategy—many of whom seem to be readers of the Telegraph, based on the feedback we’ve received. This surge in interest has not gone unnoticed by officials at the Bank of England.
In a recent staff blog, members from various market divisions noted this trend as a "global phenomenon." Their analysis revealed that while bond yields—the interest paid by the government on its debts—have stabilized since the tumultuous aftermath of the 2022 mini-Budget, demand from retail investors remains robust.
Although it is estimated that individual retail investors own only about 4% of all currently issued gilts, the authors remarked on the noticeable rate of change in this area.
However, what if retail investors like you and me began to play a much larger role in this arena? This shift could be a significant boon for the Chancellor, who is constantly striving to reduce borrowing costs, as well as for the Bank itself.
This week, Andrew Bailey, the Governor of the Bank of England, cautioned Members of Parliament that hedge funds now predominantly control trading within Britain’s £3 trillion gilt market. He emphasized that while the influx of cash from traders aids government borrowing, it also poses risks to financial stability.
As James Sproule, the chief economist at Handelsbanken UK, pointed out, relying heavily on these types of investors is akin to being "dependent on the kindness of strangers," echoing similar warnings from former Governor Mark Carney.
Sproule elaborated, stating: “Not only are such investors unlikely to remain loyal to the UK amidst the inevitable fluctuations of financial markets, but many of them also operate with high leverage.” This means that any minor shifts in the UK’s economic conditions could lead to exaggerated reactions from these funds, resulting in a more volatile investor base than you or I.
Thus, promoting greater domestic investment in our national debt is not just wise; it would stabilize the ownership of the country’s financial obligations while also encouraging savings among citizens.
Simon French, chief economist at Panmure Gordon, has proposed that the government consider making these investments exempt from inheritance tax to attract even more capital. He argues that while this could lead to lower revenue from death duties, it would likely result in immediate benefits through reduced borrowing costs as demand for gilts increases.
French expressed his optimism, noting, "We would be surprised if this was not under active consideration," hinting at the possibility of a mid-2026 Budget that might justify such a strategic move to broaden the domestic base of gilt ownership.
Regrettably, current indicators do not suggest that Rachel Reeves’s chancellorship is willing to adopt—or even contemplate—such a strategic initiative. Even a reduction in inheritance tax that ultimately funds additional government spending would undoubtedly attract criticism from the party’s left wing, who are already poised to challenge the leadership.
In the meantime, if you’re interested in joining the ranks of amateur gilt investors, you can find a comprehensive step-by-step guide here (https://www.telegraph.co.uk/money/how-profit-rachel-reeves-bond-nightmare/).
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