Chancellor Philip Hammond announced the plans during a trip to Washington this morning as part of his bid to reassure American financial companies that the UK is still open for business.
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The government still owns 9.1 per cent of Lloyds, equal to around £3.6bn, through UK Financial Investments (UKFI), a group set up to manage the government's holdings in Lloyds and RBS.
However, Hammond said the sell-off will not be open to retail investors as it had previously been planned. Instead, the shares will be sold through a "trading plan", which gives institutional, experienced investors the chance to buy a stake in Lloyds directly from the government.
"Returning Lloyds to the private sector is in the interests of the bank, taxpayers and the country as a whole," Hammond said.
"That is why exiting our stake in Lloyds in an orderly way and at the best possible price is one of my top priorities."
On scrapping the plan to give taxpayers a chance to buy shares directly, Hammond said: "I have listened to the experts. Ongoing market volatility means it is not the right time for a retail offer."
The plan was put into action today, and the Treasury confirmed "sales may commence in the coming days."