UK Financial Investments, which manages the stake in the Bank of Scotland and Halifax owner, cut its holding by about one percentage point to 0.89 per cent.
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Last week, Chancellor Philip Hammond said the government has recouped the £20.3 billion used to bail out Lloyds during the financial crisis.
At its peak, Lloyds was 43 per cent owned by the state.
More than £20.4bn has now been returned to government coffers since the lender’s bailout. This includes about £500 million in payouts to shareholders since the bank resumed paying dividends in 2014 as it has returned to profit growth in recent years.
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The taxpayer’s final stake in Lloyds is expected to be sold off in the coming weeks, with any profits being used to pay down the deficit.
The announcement comes a week after the Chancellor admitted that the government is prepared to sell its 72 per cent stake in Royal Bank of Scotland at a loss to the public purse.