In an attempt to close a tax avoidance loophole the Budget has introduced a potential tax shock for investors in UK fixed interest and convertible bonds.
The tax threat arises from a clause in the finance bill that widens the scope of the "relevant discount securities" rules (RDS). If a bond is classed as an RDS, any gain when disposed of is taxed as income, rather than a capital gain.
This could mean that gains on most UK fixed interest and convertible bonds issued by companies are taxed as income rather than as a tax-free capital gain. This would increase the tax burden on unit and investment trusts and non-pension insurance funds, as well as individuals.
This threat does not apply to government securities, as it is only aimed at companies that issue bonds designed to circumvent the RDS rules.
Following protests from the financial services industry, there is an indication that the finance bill may be altered in order to more closely target the perceived avoidance schemes without affecting ordinary investors.