LONDON (Reuters) - The government is abolishing a transaction tax on shares purchased in exchange traded funds (ETFs) in an attempt to lure financial services activity from rival European centres.
While Britain is an established hub for fund management, most of the European ETF industry is domiciled in Ireland and Luxembourg for tax efficiency.
As part of a half-yearly update on the British economy on Thursday , the government said it would remove the stamp duty charged on ETFs in April 2014.
"Today, we also abolish stamp duty for shares purchased in exchange traded funds to encourage those funds to locate in the UK," Chancellor George Osborne told parliament.
ETFs typically track baskets of shares, bonds or commodities and are traded like stocks. They have become increasingly popular as a cheap alternative to access markets without having to invest directly in the underlying securities.
Abolishing taxes on ETF transactions adds to a raft of previously announced sweeteners introduced by a government keen to promote Britain as a financial hub by boosting sectors such as insurance and fund management.
Consultants KPMG called the move "great news for the UK investment management industry".
"UK investment managers and ultimately savers will welcome this move by the Chancellor," said Sean Randall, head of stamp taxes at KPMG in the UK.
While investors buying into ETFs will no longer pay a tax on the transaction, the fund itself will pay a charge on its purchase of the underlying investments.
Julie Patterson, director of regulatory affairs at industry body the Investment Management Association, estimates the change will boost tax revenues taken from the sector by attracting more activity to Britain.
"For every extra 1 billion pounds of new funds domiciling in the UK, an additional 700,000 pounds could be generated in UK tax revenues," she said.
Reporting by Chris Vellacott; Editing by Pravin Char