Investment Notes
By CUSTOS
THE Stock Exchange's first reactions to the budget were perhaps difficult for the layman to understand. The rise in equity prices was due to a very small amount of buying on a market which was short of stock. The institutions have not yet appeared as equity buyers to any signifi- cant degree. The gilt-edged market, on the other hand, have grown more and more depressed. As the life companies are now subject to capital gains tax, they are no longer interested in the low coupon stocks in the short- and medium-dated sections of the gilt-edged market. These stocks, therefore, tended to fall, bringing down the rest of the market. As the Government appears to be trapped in a dear money squeeze—and is apparently doing nothing about it—the gilt- edged market seems to have lost its attraction. In fact, the institutions are likely to become more interested in sound equity shares where growth could be substantial over two or three years. A substantial rise on an equity share, even aftbr a 30 per cent tax, would then be more attractive to a life fund than a gilt-edged holding. But no one wants to buy equity shares until they see the details of the Finance Bill.
Oil Shares
Until the Finance Bill is published there are certain groups of equity shares which must re- main under a cloud of uncertainty. This par- ticularly applies to those, like the oil companies, operating overseas. The Chancellor stated that he was prepared to give transitional relief over the next five years by way of cash payment to such companies to soften the blow of corpora- tion tax. His proposal is that these companies should be allowed to credit some of their foreign tax against the UK tax they will now have to pay on the dividends. This relief, paid to their own shareholders, is to be based on the amount of 'overspill'—that is, the amount by which the tax paid by the company overseas exceeds the UK corporation tax. On the basis of a 40 per cent corporation tax and on the 1964 profit figures, the amount of overspill available to the two major oil companies and the amount required to pay their dividends gross appears to be as follows: Shell BP Overspill in £ million £9.28 million £43.0 million Required to gross up
dividend in £ million £29.4 million £22.46 million This suggests that SHELL will be badly affected and BP hardly at all. But I advise investors not to proceed on this until they see the Finance Bill.
Investment Trusts and Unit Trusts
The Chancellor admitted that there was a special case for relief on capital gains tax for holders of unit trusts and investment trusts. The net capital gains on which tax has been paid by these trusts is to be deducted from the taxable gains of the equity shareholder. According to one firm of brokers this concession might work out as follows: if, for example, an investment trust paid £100,000 in capital gains in a finan- cial year and there were 2,000,000 shares in issue, shareholders would have Is. added to the cost of their shares for the purpose of their net long- term capital gains tax. The dividends received by investment trusts from other companies which have paid corporation tax will not be chargeable to corporation tax again. In other words, the divi- dends will be franked for corporation tax pur- poses. But the income from gilt-edged and deben- tures will be unfranked and will therefore be of small value to the investment trust unless management expense, can be set against it. But do not sell investment trust shares because of this; trust the managers to find the-way round.
Previous page
