Revenue removes trading barrier

THE Inland Revenue yesterday removed a barrier to developing international share trading in London when it said withholding tax would no longer be imposed when international securities are lent to dealers by foreign investors.

The move has long been sought by the London Stock Exchange, but has taken more than two years to implement since similar provisions were announced for UK securities.

Stock lending is a vital ingredient in securities trading. It allows market- making firms to acquire shares and bonds temporarily, and thus continue trading even if there are problems getting hold of stock. In return for a fee, lenders provide a pool of extra liquidity for dealers to draw on when sales and purchases are mismatched.

Until now, the Inland Revenue has insisted on treating dividends on overseas securities lent by foreign investors as if they were normal investments, subject to withholding tax, which has to be reclaimed. This deduction will no longer be made. The Inland Revenue delayed while it satisfied itself that the move would be practicable and that it would not lead to evasion.

London is the largest centre for trading international equities, and dealers said the extra liquidity that would become available would be an important help. Two accompanying changes widen the number of lenders with access to the market.

Up to pounds 8bn of gilts and pounds 2bn of UK equities are being lent at any one time, and market estimates are that the equivalent for international stocks is about pounds 10bn before the change, showing the scale of the marketplace.

'These reforms will enhance London's position as the leading centre for overseas securities lending,' said Ian Plenderleith, an associate director of the Bank of England and chairman of the City's Stock Borrowing and Lending Committee.