Tax threat over bond revolution

By JOANNE HART
Updated: 18:02 EST, 23 January 2010

The taxman is threatening the launch of a new multi-billion pound retail bond market planned by the London Stock Exchange and offering ordinary people a new way of saving while cutting the cost of borrowing for firms.

Due to open a week from tomorrow, the market would enable investors to buy and sell bonds that pay a fixed amount of interest that would be considerably higher than bank or building society savings rates.

But the market is under threat because Revenue & Customs intends to tax individual trades, even though institutional investors do not pay tax when they trade.

Brokers say an open bond market would benefit companies, including Manchester United, which launched a bond issue last week

City banks also oppose opening the market to retail investors because until now bonds have been bought almost exclusively by large institutions, with prices negotiated behind closed doors, allowing the banks to make enormous profits.

The LSE is proposing an open market where prices are available for everyone to see.

The move is being enthusiastically supported by private client stockbrokers, but banks – which can make more money from institutions – are understood to be dissuading companies from offering bonds to small investors.

Enthusiasm from individual investors would make it cheaper for companies to borrow money on a bond market where they raised more than £55 billion last year, according to Paul Killick, partner of stockbroker Killick & Co.

‘Last year, John Lewis launched a bond with an 8.5 per cent coupon [annual interest rate],’ he said.

‘We told them we could easily have sold the bonds to our clients at seven per cent.’

Last week, Manchester United launched a bond paying annual interest of at least 8.75 per cent.

One broker said: ‘They could have done much better in the retail market, but banks keep advising companies to steer clear of this sector.’

The LSE initiative was expected to open it up, but the Revenue’s stance is a real threat.

‘We are talking about a tax of half a per cent here, which corporate bonds are usually exempt from,’ said Andy Thompson of the Association of Private Client Investment Managers and Stockbrokers.

‘It is a legislative anomaly and we have been talking to the Revenue about it for some time. It is a real problem.’

A Revenue spokesman said: ‘The bonds traded through the new order book will not have any special treatment. They will be chargeable – or exempt – from Stamp Duty Reserve Tax, depending on their characteristics according to the normal rules.’