Institutions to benefit from gilt changes

The Treasury announced new reforms of the gilts market yesterday as part of its modernisation programme while the Inland Revenue simultaneously proposed important changes in the tax treatment of gilts.

But the announcements, made just after the market closed yesterday, caused chaos in the City. One trader said: ''Two-thirds of the City was out of the office watching the rugby.''

The Ascension Day holiday on the Continent meant trading was abnormally quiet, and many City firms had hired halls with big screen televisions for their employees.

The latest Treasury proposals, following its earlier decision to introduce a gilts repo market, will allow investors to hold the coupons and principal of gilt-edged stocks as separate instruments - or ''strip'' the coupons. This is an important innovation for institutional investors, who will find it easier to hold gilts that match the maturity of their liabilities.

The Inland Revenue is proposing sweeping tax reforms that will make a strip market possible and end tax distortions between different types of gilts. All returns on gilts and bonds will be taxed as income. In future, there will be no tax advantage to holding low-coupon gilts to pay less income tax rather than capital gains tax.

An analyst said last night: ''In the broadest sense, we have to welcome these changes. But in the short term, there will be great confusion.''

Gilts futures fell in after-hours trading on the news.