Proposals to issue UK retail bonds dedicated to defence, sometimes described as "war bonds" by their proponents, are back in the spotlight as a potential route to finance increased military spending. The concept would allow ordinary savers to buy government-backed securities whose proceeds are ringfenced for support of the armed forces and defence investment.
Support in both Parliament and parts of the City of London has helped the idea gain traction. Advocates argue the instruments could appeal to retail investors by combining returns backed by the government with tax incentives intended to improve their after-tax yield.
Under proposals circulated by City economists, purchasers of these defence bonds could receive tax reliefs such as an exemption from inheritance tax, while preserving the capital gains tax exemption already available to holders of UK gilts. Those supporting the plan estimate the scheme could raise at least A310 billion in its first year, and some proponents believe total receipts could ultimately top A320 billion.
The discussion over dedicated defence bonds is unfolding as ministers ready a long-awaited defence investment plan set to be published before the NATO summit in July. Pressure to find fresh sources of funding intensified after the resignation of Defence Secretary John Healey, who said previously announced increases were insufficient.
Britain has already pledged an additional A313.5 billion for defence, but officials continue to explore further options to expand spending. Proponents of retail defence bonds say the instruments could also serve a broader fiscal purpose by diversifying the investor base for UK government debt - currently around one-third of the gilt market is held by foreign investors.
By attracting more domestic savers, supporters contend, the bonds would bolster demand for government paper while providing a discrete funding stream for defence needs. The UK has previously introduced thematic gilts; green gilts were launched and later extended to retail investors in 2025 as part of the government's sustainable finance measures.
Any move to create defence-specific retail bonds would need formal government approval. To date no policy decision has been announced and the proposal remains under discussion among policymakers, advisers and parts of the financial sector.
Market reaction to the broader defence spending debate has been noticeable in defence-related equities. BAE Systems shares were reported up 0.89% amid the unfolding conversation about defence financing.
Context limitations - While estimates from supporters about potential fundraising and proposed tax treatments have been cited, no government policy has been finalized and the ultimate structure, scale and timing of any defence bond issuance remain undecided.