The Gazette 1990

GAZETTE

' APRIL 1990

lose some of their value in terms of Irish pounds. But if you want to invest in over- seas shares, your stockbroker or bank can handle the deal. But it is not sufficient just to make the settlement through the Irish agent. Payment has to be made through the Irish Agnet too. Individuals are not allowed to send Irish pound cheques to non-residents in pay- ment for share purchases. Dividends have to be repatriated immediately although it is permissible to keep the sales proceeds from foreign shares abroad for up to three months if it is intended to reinvest them. SHARES ARE NOT the only investment which are bought and sold on the stock exchange. The very name comes from government stocks, or Gilts - as they are oometimes called. These can be an attractive investment for the ordinary investor. They are not something solely for the high flyer. There need be no great mystery about them. No DIRT tax is stopped on the inverest paid on Government stocks so they can be particularly attractive to the non-taxpayer who being under 65 years of age and not incapacitated is unable to re- claim the DIRT tax stopped on normal deposit interest. Those liable for income tax are supposed to declare the interest received from the investment in Government stocks and pay the relevant tax. But those outside the tax net have no more worries. Although the price of Govern- ment stock can move up and down, the investor who can hold on until the redemption date of the parti- cular stock takes no risk. So it is possible to invest on a no-risk basis. Unfortunately many people are put off by the very idea of investing on the Stock Exchange - either in shares or Gilts. But there is no need to be. It is all quite simple. First an explanation of what a Government stock is. When the Government borrows from the public, the financial in- stitutions, or the banks on a long- term basis it does so by "selling" new Government stock. The stock can be thought of as an IOU. In return for the loan the Government gives out this IOU promising to pay the lender so much interest every six months and to repay the full amount of the loan at some time in

the future. Usually the repayment date is left a little flexible. It may be set as between 2000 and 2005, for instance. In such a case it is usually assumed that the loan will be re- paid at the later date i.e. 2005. The person, or institution, who initially made the loan now owns a valuable IOU which gives the bearer the right to an interest pay- ment every six months and a lump sum at some date in the future. It is those lOUs which are sold on the Stock Exchange. But their value can vary from day to day and from week to week. Let us see why that should be the case. Suppose someone lent the Government £100 some years ago, say by buying a 6 per cent Stock redeemable in 2005. What he got was one of our lOUs promising to pay him 6 pc a year up until 2005 and then to give him back £100. How much is that IOU worth now. . . . it is possible to invest [in Government stock] on e no-risk besis." It only entitles the bearer to £6 a year in interest payments but with interest rates at about 12 pc, a would be purchaser can get an annual income of £6 by investing £50 in a bank. Of course, he also knows that he will get £100 in 2005. But that is a long way off. So the purchaser may not be willing to pay much more than about £55 for the IOU at this time. If he buys it for £55 he will get an interest return of a little under 11 pc on his investment (£6 interest on £55 investment) and he also has the certainty of getting more than his £55 back in 2005. If he holds the Government stock - or the IOU as we have been calling it - until 2005, he knows for certain what his return will be and he takes no risk. If he has to sell the IOU before then, he can not be sure what it will fetch. Its price will always be determined by the alternative in- vestments available and that will be determined by the general level of interest rates. There are so many Government stocks, however, that the small investor should always be able to pick one with the right number of years to go to redemption to suit his particular requirements. It can be an ideal investment for someone with a redundancy lump sum who

knows that he is going to be out of the income tax net and wants to get a good income on his money which is not going to be subject to DIRT tax. In addition to their attractions for non-taxpayers government stocks may also be attractive inivestments for high taxpayers. The return can come in two ways: there is the annual interest; and there is the capital gain which can be made if you buy stock at one price and sell at a higher price. As mentioned above, if interest rates in general fall, the price of stock goes up. While the interest is liable to income tax, the capital gain is not. It is not considered income and it is exempt from capital gains tax. This provides some attractions for the high tax payer. A person paying tax at more than the standard rate finds any tax free return attractive. If he can buy a stock which comes up for repay- ment in the near future, he can be sure of making a capital gain with- out any risk, and his after-tax return can be relatively high. He will not be paying tax on a large portion of that return. For that reason this type of stock is much in demand by high income tax payers who will bid up the current market price. Because the price is bid up, they are generally less attractive to low income tax payers. Very often, indeed, they are unobtainable since there are no sellers. [ ] The 1990/91 edition of Colm Rapp/e's book "Family Finance" from which this article has been extracted is now on sale. It has been updated for the 1990 budget. Campbel l O'Connor & Co.

Government Stockbrokers 8 Cope Street, Dublin 2 When you, or your clients, need advice on investment, We'll be happy to talk to you. Ask for' BRIAN O'CONNOR, ALBERT MacFARLANE BRENDAN O'CONNOR Tel.: 771773 Fax: 679 1969

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