Chancellor George Osborne has baffled investors and market analysts with a move to scrap stamp duty on exchange traded funds (ETFs).
The Autumn Statement announcement sounds generous – but industry insiders have pointed out that out of several hundred ETFs listed in London, none pay stamp duty – and neither do the investors making the trades.
This is because although the ETFs are listed in London, all are based offshore and are already exempt from stamp duty.
The London market hosts almost a thousand ETFs but all are based overseas.
So the question is why has Osborne bothered to make the announcement?
Luring offshore cash
With no fund or investor benefitting, the rule change seems pointless.
One reason put forward by the Financial Times is Osborne is trying to grab some of the investment cash pouring into ETFs based in low tax jurisdictions in Europe as the funds grow in popularity with investors.
ETFs – mainly based in Ireland and Luxembourg – are a £250 million a year business.
By lifting stamp duty on buying and selling ETF shares, Osborne has put the UK into play as a competitive market to rival both other financial centres.
Behind the play is the corporate tax regime in the UK, with Osborne pledging to lower taxes on company profits in successive budgets.
By luring ETF funds into the UK, Treasury coffers would see another flow of revenue from fund profits, so the Chancellor is eyeing this cash to boost his tax coffers.
Protecting investors
The money could go into funding infrastructure projects, funding tax incentives or bringing down the fiscal deficit.
Nevertheless, this is one for the future as setting up a fund and then waiting for the tax on profits is unlikely to see any return for some years – and definitely not until after the next General Election in 2015.
Investors would also benefit as their equity stakes in ETFs would come under the umbrella of the Financial Services Compensation Scheme, making the investment less risky by offering a route to the Financial Ombudsman if things were to go wrong or in cases of misselling by scheme promoters and independent financial advisers.
However, industry insiders argue that no investor has so far lost money because of an ETF collapsing.
The funds are popular with pension investors who can spread the risk of equity investment by pooling their cash with other investors in a fund rather than putting money directly into a company or commodity.
