War Bonds — A Good Idea Whose Time Has Come?

With Keir Starmer's resignation as Prime Minister and Andy Burnham widely expected to step into Downing Street, attention is already turning to what a Burnham economic agenda might look like. One idea that has caught my eye comes directly from his economic adviser Andy Haldane, who has gone on record advocating for war bonds — government-backed defence bonds available to retail investors — as a way to fund the UK's increasing defence commitments. It's an idea I think deserves serious attention.

The Funding Question

The UK needs to spend more on defence. That's pretty hard to argue with given the current state of the world. But the uncomfortable truth is that unless the government is willing to cut spending elsewhere or raise taxes significantly, the money has to come from somewhere. Neither of those options is particularly popular or straightforward.

War bonds offer a third way. Rather than raising taxes or cutting services, the government could tap into something that doesn't get talked about enough — the enormous amount of money sitting in personal savings accounts across the UK, largely doing very little.

Starting With Everyday Savers

My view is that this should be aimed squarely at retail investors to begin with, rather than City institutions. The whole point is to unlock that pool of personal savings and get ordinary people genuinely engaged with government debt. While retail interest in gilts has grown significantly in recent years, overall holdings remain modest and concentrated. War bonds with the right tax incentives could bring in a much broader group of everyday savers who have never engaged with government debt before. To do that effectively, the product needs to be genuinely attractive. Which brings me to the tax advantages.

Making It Worth Their While

I don't think the coupon rate needs to match current gilt rates. That's actually missing the point. If the right tax advantages are layered on, a slightly lower interest rate still makes war bonds more compelling than leaving money in a standard savings account where the interest gets taxed anyway. The math works in the investor's favour.

Here's what I'd like to see:

IHT exemption — Making war bonds free from inheritance tax could be a genuine game changer, particularly for those already thinking about estate planning. A government-backed, IHT-free investment is a compelling proposition.

ISA inclusion — Even a modest £5,000 war bond allowance within the ISA wrapper, on top of the existing £20,000 limit, would make this accessible to a much wider group of savers and bring in people who have never invested in government debt before.

CGT exemption — UK gilts already benefit from capital gains tax exemption. Defence bonds should retain this as standard.

Who Stands To Benefit

Genuinely — a broad range of people. But I think the baby boomer generation in particular should pay close attention. This demographic holds a significant proportion of UK personal wealth and many are already thinking carefully about inheritance tax and how to pass on their estate efficiently. A patriotic, government-backed bond sitting outside of their estate for IHT purposes is a very straightforward conversation to have.

For younger savers, the ISA angle is the draw. Give people a ring-fenced allowance for defence bonds within a tax-efficient wrapper and you'll see take-up from people who have never considered investing in government debt before.

On Balance

I think this is a sound idea. Not a perfect one — and nothing is confirmed given the current political uncertainty — but the underlying logic is solid. A clear national purpose, meaningful tax advantages, and accessibility to everyday investors could make this one of the more interesting retail investment opportunities to emerge in some time.

The real test will be whether a future government can make a credible case for spending restraint alongside it. Markets will need convincing. But if that discipline is there, war bonds could be a genuinely useful addition to the UK savings landscape — good for investors, and good for the country.

Disclaimer: This blog is for informational and educational purposes only and does not constitute regulated financial advice. Please consult a qualified financial adviser before making investment decisions.