Rivals reject Barclays controversial tax-free structured products

Rival investment banks have decided against following Barclays into creating tax-free structured products for wealthy clients for fear that HM Revenue & Customs (HMRC) could take a dim view on them.

Barclays has been selling tax-free structured products to high net worth clients for more than a year via its Barclays Wealth division.

It is understood Citigroup has also begun looking at similar structures for its private banking clients and is now operating in this space.

However, several rival investment banks have told Citywire they deem these products to be ‘too aggressive’ and although they are legal, the banks fear that HMRC might ultimately take a negative view on the tax treatment of the products.

It is understood the products are simple structures, such as auto-calls. The client undertakes the credit risk of Barclays, and the return is based on the performance of an index, such as the FTSE 100.

However, the twist is that the investment bank uses gilt options for structuring and any profits on maturity of the product are delivered as gilts, meaning payments would not be liable to income or capital gains tax.

At present, gilt options – unlike other types of options – are tax-free.

Allen & Overy – the global law firm that is actively involved in assessing the tax treatment of structured products – is understood to have reassured rival investment banks that there is a high probability these products would be deemed tax-free by HMRC.

Worries over tax

However, one head of structured products at a major investment bank said: ‘[We believe it is] against the spirit of the tax rules. We just backed off completely. It’s one of those things where the reputational risk is just so great.’