Capital gains tax hike to take shine off zeros

21 May 2010 8:00 am | By Hannah Stodell

Experts warn that zero-dividend preference shares will become less attractive with a higher capital gains tax rate, which is expected to be introduced by the coalition Government.

ZDPs became a more attractive investment proposition for high earners after last year’s Budget introduced a 50 per cent income tax rate because the share class is subject to 18 per cent CGT. However, JP Morgan Asset Management investment trusts product development vice president Richard Plaskett says levelling CGT with income tax will hit the relative attractiveness of ZDPs.

He says: “It cannot help zeros and the new issuance of splits. That said, many private investors do not use their CGT allowance, so zeros are still a useful tool in planning future capital gains.

“The emergency Budget is the obvious time for a change but even if it is not then, we would not plan new products with the differential as a core element.”

ZDP issuance totalled a little more than £220m in 2009 and around £35m to £40m this year.

Winterflood Securities head of investment trust research Simon Elliott says higher CGT will make zeros less attractive but not obsolete.

He says: “Everyone has been expecting a CGT rise for some time. That we have seen zero issuance over the last year suggests those investing are looking for a greater certainty of annualised return than purely playing the tax-rate differential.”

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