Britain finds itself grappling with a significant national debt issue, while many of its affluent families face their own challenge with inheritance tax. Interestingly, a potential solution could address both problems simultaneously.

The idea is to reduce reliance on jittery institutional investors and instead engage British savers, who might be willing to invest in UK government bonds in exchange for a break on inheritance tax.

By exempting gilts—another name for UK government bonds—from inheritance tax, the nation could finance a substantial portion of its borrowing through the steady and reliable capital of British savers. This approach would be less vulnerable to the whims of large investors, who often incite anxiety in the bond market.

Though this strategy wouldn’t directly reduce the nation’s debt, it offers a pathway to secure long-term investment. It would allow the government access to stable funding while providing British savers with a dependable income and alleviating the heavy burden of inheritance tax.

Over time, this could lead to increased economic growth, enabling the government to invest more sustainably in productive long-term projects, potentially helping to balance the national budget.

Eventually the extra growth that we could get from borrowing more sustainably for productive long-term investment could start to balance the books.

Britain’s reliance on government borrowing leaves us at the mercy of capricious bond investors and has contributed to repeated ham-fisted tax moves

The UK’s inability to live within our means has led us to depend on government borrowing to fund public spending. Last year we borrowed £140billion, according to the ONS.

Meanwhile, our £2.8trillion total debt pile means we can’t do as much sensible borrowing as we need to fix our crumbling infrastructure, let alone build what we need for the future.

This problem has been exacerbated by two once-in-a-lifetime financial disasters that happened less than 15 years apart, the financial crisis and then the Covid pandemic.

The emergency response to both sent government borrowing through the roof and the clumsy attempts to deal with that have left us in what leading economist Paul Johnson dubs a ‘fiscal doom loop’

We have ratcheted up taxes to the point where they are counter-productive. Frozen thresholds and tax traps have led to a cottage industry in some of the nation’s most productive workers trying to earn less money. 

Meanwhile, the rich respond to raids on aspiration and wealth by hoarding money rather than spending it.

Workers, savers and investors have all been hit and then the taxman comes round again for another go with inheritance tax when you die.

Inheritance tax is steadily snaring more in its net and driving up receipts for the government – but it still represents just 0.7% of the tax take, says the OBR.

Inheritance tax has become an £8.7billion a year cash cow that catches increasing numbers of families, and the situation is about to get far worse when unspent pension pots are caught in the net, from April next year.

Most people’s estates don’t get hit by inheritance tax but with the rate set at 40 per cent those that do can end up with bills running into the hundreds of thousands. 

Government figures show that estates valued between £1million and £1.5million pay £153,000 on average in inheritance tax, while those valued at between £1.5million and £2million pay a stonking £322,000.

Figures like that highlight why inheritance tax achieves the rare accolade of being a tax only a small proportion pay, but that is widely reviled.

I believe the main issue is the high 40 per cent rate and that cutting inheritance tax to 20 per cent would make it far more palatable. 

But many people would like to see IHT axed altogether – and arguably a tax that’s so controversial but accounts for just 0.7 per cent of overall tax reciepts should go. Unfortunately, governments have painted themselves into a corner as they rake in more from it.

Successive Chancellors have known that our tax system is in a mess, but none could afford to fix the problem and have then ultimately ended up making things worse.

The difficulty they have all shared is a fear of doing the right thing but still upsetting the bond market. This is a worry that has only been ramped up by the trauma from the Liz Truss-Kwasi Kwarteng mini-Budget debacle. 

Since then we’ve seen a number of mini panics. Rachel Reeves suffered a bond yield spike in early 2025, and then in summer last year markets were unnerved by the idea the Chancellor would get the boot and get replaced by a more ardent left winger. 

The lingering potential for Sir Keir Starmer to depart as PM, and the left wing of the Labour party to seize control, loosen spending and hike taxes further, has led commentators to claim a return for Britain’s ‘moron premium’, which means we have to pay higher rates to borrow.

Despite all that and the intense anxiety around UK government bonds, ordinary investors have been displaying a healthy appetite for buying gilts, as highlighted by a recent Bank of England blog post.

Its authors Sarah Munson and Callum Ashworth noted much of this is concentrated among short-dated gilts, where investors have been taking advantage of capital gains being tax-free, but also that there is interest in longer-dated bonds for their yield too.

Investment platforms have been reporting strong interest in medium and long-term gilts from investors looking to hold them to maturity and pick up the interest along the way.

The crucial difference between institutional investors and retail investors – as people like me and you are known in the industry – is that us ordinary folk tend to buy gilts and hold them to their end date.

Some of that currently involves buying older low rate gilts below par and then getting paid out full face value at the end, thus scooping up a tax-free capital gain, but there is also demand for newer gilts and the income they offer. 

Five-year gilts currently pay 3.7 per cent, ten-year gilts pay 4.3 per cent and 30-year gilts pay 5.1 per cent. 

Buy and hold these to maturity and you will get the face value back and that income paid out each year. Investors like this idea of a guaranteed return as a low risk part of their portfolio.

It’s clear that there is an opportunity for the government to tap up patient investors who won’t be indulging in bond market trading. 

Give them an inheritance tax break and more will gladly hold gilts. Wouldn’t it be wise to swap the free-wheeling bond vigiliantes for Britain’s comfortable middle-class in their detached homes?

Why not make it that gilts that run for five years or longer are inheritance tax-free if passed on and held to maturity, or have a 10 per cent IHT charge if cashed in early by beneficiaries?

There would need to be a minimum holding period and the idea needs fleshing out but it is certainly something Rachel Reeves should mull over. With £2trillion held in cash savings, according to Bank of England figures, there’s an opportunity there.

I wrote about this idea of tapping Britain’s deep-pocketed savers in a column last year, as gilt yields spiked. Britain’s finances haven’t really got better since then and the economy is stuck in even more of a funk.

Simon French, chief economist at Panmure Liberum, recently made a similar suggestion on IHT and gilts, saying that they should be entirely free of inheritance tax.

He pointed out that while it would cost a future government money in death duties, it would do the current one a favour with greater stable demand for gilts lowering borrowing costs.

This is one piece of short-term thinking, the Chancellor should consider.