COMMENT:Bounty forgilts investors

The general election beckons, said John Major to the massed ranks of the party faithful last Thursday, fresh from his triumph in the leadership election. And lo and behold, Inland Revenue miserliness in the introduction of taxation on capital gains in gilts turns into bounty for the vast majority of private investors.

The proposal for a threshold on holdings of gilts of pounds 200,000 is far more than had been expected, and brings down the number of private investors breathing fire at what they regarded as retrospective taxation to about 4,000.

The occasion for this volte-face is the introduction of a gilts strips market. Starting in a year's time, a number of gilts will be stripped into their constituent interest and principal payments so that they can be separately held or traded. The problem was that this change required capital gains on gilts to be taxed as well as interest payments on them. Otherwise, as the Bank of England set out in its consultative document in May, tax distortions would emerge as UK taxpayers piled into stripped gilts.

As so often in the Government's handling of City-related issues, the interests of big operators seemed to ride roughshod over those of the small investor. Since exemption from capital gains tax for private investors had long been a principal attraction for investments in gilts, many felt betrayed. Yet in creating the new super-generous exemption, it is difficult to see how it can satisfy the Bank.

Its warning in May that the introduction of gilt strips under the current tax regime "or any minor modification of it" would "perversely, add to tax distortions and increase the scope for tax avoidance trading strategies" seems likely to be prescient.