The Government back-tracked yesterday over planned tax reforms of gilts and bonds by promising to exempt the vast majority of private investors from the changes.
Kenneth Clarke, the Chancellor, announced that the new tax rules would apply only to holders of more than pounds 200,000 worth of gilts, which is 10 times more than the figure which was first mooted.
The Treasury now believes only 4,000 out of about 750,000 investors in gilts will be affected by the tax proposals.
Mr Clarke's Commons answer follows weeks of lobbying from unit and investment trust companies opposed to the changes, which were first announced in May.
He said: "There is widespread acceptance that the Government's proposals will produce a simpler and more sensible tax regime, and reduce business compliance costs. They will allow issuers and investors to take decisions in a more neutral fiscal environment.
"They will also pave the way for market innovations which would help to ensure that the UK maintains and enhances its competitive position in world financial markets."
Until now, capital gains on bonds and gilts have been tax-free, with investors taxed only on the income they receive. The new proposals suggested that the gains would be taxed as well.
Higher-rate taxpayers would have seen their capital gains tax liability rocket from zero to 40 per cent.
At first, it had been suggested that small investors with direct gilt holdings of about pounds 20,000 would have been exempted. But unit trust providers were still concerned that the tax could have encompassed the profits on bond unit trusts.
Fears were also raised that new corporate bond PEPs, launched last week, could be affected. Two weeks ago, the Inland Revenue relented, saying PEPs would be exempted. Yesterday's announcement goes further.
Private investors will continue to pay tax on interest on the present basis, subject to the pounds 200,000 upper limit. Above that amount, although gains will be taxed, losses can be offset against them.Individual holders of unit trusts investing in bonds, even if they are not in PEPs, will also be exempt, up to pounds 200,000.
Zero-coupon preference shares, one of a class of shares used as a low- risk investment for long-term financial planning, will also be exempted, following intense lobbying from the investment trust industry concerned at the effects on a pounds 4.5bn market.
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