As far back as the 1960’s, the attractive tax status of Eurobonds saw the UK’s domestic bond market contract significantly. In the UK, punitive tax rates on interest payments, plus the levying of stamp duty on each transaction made the market unattractive and as neither of these components were chargeable at source on corresponding overseas securities, the bulk of business moved out of the UK.
Whilst the tax situation on income from interest payments is now very different, a complex web of legislation means that the application of stamp duty in this market is something of a grey area, offering little incentive for the majority of debt issuances to be conducted locally. As a result of the muddled picture and potentially higher costs, the bulk of new bond issuance for UK entities now takes outside the UK.
Regardless of any political stance on Brexit, there exists an opportunity for the UK to rekindle its own bond market – a move that would bring with it a myriad of benefits. These would range from – by our own estimates – creating tens of thousands of jobs in the financial services sector, through to making debt issuance available to companies who are currently priced out of this market, whilst also providing a degree of protection from potentially unpopular legislative moves such as the, often discussed, EU wide application of a Financial Transaction Tax.
With the UK budget now just a matter of days away, we would call on the Chancellor to give serious consideration to clarifying the current jumbled tax legislation surrounding bond issuance. With such a small bond market at present and much of that being seen as exempt from SDRT, removing stamp duty obligations from the entire ‘debt securities’ sector would put the UK on a level playing field with the thriving $2 trillion Eurobond market, but with minimal impact on tax receipts. Cultivating a domestic market would also have the ability to reduce costs for all issuers.
The reality is that Brexit means an end to passporting rights for UK financial services providers across the European Union. Although a transition period seems likely and a series of time limited exemptions are to be expected, with the support of politicians the UK has the ability to rebuild its bond market as a centre of excellence, not only for domestic issuances but also to once again bring together issuers and investors from across the globe.
Dr Hardeep Tamana