P566ORACLE 566 Mon24 Feb C4 1712:24
1/6
THE A-Z OF
INVESTMENTS
L is for Local Authority investments
Local authority spending has been much
in the news of late and the Government
has just published its own proposals
for rate reform.
Most of us know that local authorities
raise money by levying rates, but they
also borrow money from ordinary people
in return for interest. Local authori-
ties have been borrowing this way for
over 100 years ─ since 1853, when the
Borough of Oldham borrowed to take over
the Oldham Waterworks Company.
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CADBURY'S CHOCOLATE RECIPE 184 (ITV)
P566ORACLE 566 Mon24 Feb C4 1711:01
2/6
THE A-Z OF
INVESTMENTS
Anyone with a lump sum to invest they
know they won't need for a fixed perigd
of time can consider lending to a local
authority. Corporation loans are also
known as local authority mortgages or
tap bonds. You buy them direct from the
authority for a usual minimum of £500-
£1,000. The loan is for an agreed spell
of 1 to 10 years and the interest you
get is fixed.
Rates vary from one authority to
another and will depend on the amount
and duration of the loan. Last week,
Leicester City Council was offering
11¾% gross on a one year loan, Salford
10¾% a year for a five-year period.
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P566ORACLE 566 Mon24 Feb C4 1711:04
3/6
THE A-Z OF
INVESTMENTS
From April 6th local authority fixed
term loans will become less attractive
to non-taxpayers.
At present, basic rate tax of 30% is
deducted before investors get interest.
Non-taxpayers can reclaim the tax. For
bonds bought before November 18th 1984,
nothing will change. For bonds bought
after this date, local authorities will
like banks and building societies,
deduct a 25% composite rate of tax.
Non-taxpayers won't be able to get this
back. Basic rate taxpayers will benefit
however. On a bond paying, say, 10½%,
their after tax return will rise from
7.3% to 7.87% a year.
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P566ORACLE 566 Mon24 Feb C4 1703:54
4/6
THE A-Z OF
INVESTMENTS
How can you tell which local authority
is offering the best rate of interest?
The Chartered Institute of Pualic
Finance and Accountancy runs a Loans
Bureau which will tell you the best
authority for the amount of money and
the length of time you want to invest
You can phone them (01-920 0501)
between 3.30pm and 5.30pm Monday to
Friday or write for a copy of their
list, published weekly. This costs
£2.50 (the telephone advice is free)
from CIPFA Loans Bureau, 65 London Wall
London EC2.
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P566ORACLE 566 Mon24 Feb C4 1714:28
5/6
THE A-Z OF
INVESTMENTS
Another way to invest in local author-
ity bonds is through negotiable bonds.
Known as yearling bonds because most
used to be issued for one-year perigds,
these are now more likely to be for 5
to 7 years. Unlike local authority tap
bonds which can't be sold to anyone
else, negotiable bonds can be bought
and sold at the Stock Exchange ─ much
like Government securities.
The interest rate on negotiable bonds
doesn't vary between authorities. The
bonds are issued every week and the
interest you get will depend on the
period for which you want to invest.
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P566ORACLE 566 Mon24 Feb C4 1722:25
6/6
THE A-Z OF
INVESTMENTS
The advantage with local authority
bonds is that, since the interest is
decided at the outset, you know how
much you'll be getting. This means,
however, that if interest rates go up
your cash could do better elsewhere.
How safe are they? The Government does
not guarantee your money but it does
lay down rules on how much an authoritz
can borrow and what it may be used for.
Local authorities may only borrow fgr
capital expenditure (like building
council houses) not on the strength of
next year's rates!
Next week: L is for Lordships
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Your Money ...560 Feature ...567