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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
110