Chancellor Rachel Reeves delivered the first Labour Budget in almost 15 years today. Financial markets responded positively, as did many fund managers.
Rathbone UK Opportunities manager Alexandra Jackson said equity markets liked the Budget, with sterling also rallying in the immediate aftermath. The chancellor has “threaded the needle of raising the taxes she needs without spooking investors”, she concluded.
Adrian Gosden, UK equities fund manager at Jupiter Asset Management, said the Budget was “tough but fair” and declared: “The UK is open for business”.
AIM stocks get a reprieve
The AIM market rallied on news that inheritance tax (IHT) relief had not been abolished altogether, even though it was halved. Abby Glennie, manager of the abrdn UK Smaller Companies fund, said that the government “did not quite throw in the hand grenade for AIM entrepreneurs and investors that many expected”.
Even so, investing in AIM stocks is now less attractive, she said. “With tax benefits halved, investors will need to be more positive on return prospects to allocate cash to AIM and this could swing allocations towards other areas.”
Capital gains tax hikes could impact investment decisions
Richard Stone, chief executive of the Association of Investment Companies, expressed disappointment at the increase in capital gains tax (CGT), coming “from a government which has put so much emphasis on investment and growth”.
“Increased tax on profits from shares is a disincentive to invest in the stock market outside an ISA or pension,” he said.
“Bringing all AIM shares and pension funds into the scope of inheritance tax will act as a disincentive to build and retain those long-term investments for the benefit of future generations.”
As a consequence of a higher CGT, multi-asset portfolios should become more appealing, according to BNY Investments’ head of retirement Richard Parkin.
“We expect the higher CGT rates will lead to more advisers looking at multi-asset funds rather than model portfolios. While CGT is still payable on these funds, using a single fund structure makes it easier for advisers to time when gains are realised,” he said.
“These higher rates of CGT and lower thresholds make it even more important to maximise tax-advantaged investments such as ISAs and pensions and it’s good to see that the tax benefits of these vehicles have largely been maintained.”
That said, Rachael Griffin, tax and financial planning expert at Quilter, pointed out that CGT is paid by only 350,000 people per year (equating to 0.65% of the adult population).
“This will not be a change that is felt throughout the nation. But while this move is aimed at boosting revenue, is likely to have the opposite effect, as it discourages investment and leads to reduced economic activity across key sectors,” she said.
"One key problem with raising CGT is that it doesn’t necessarily guarantee more tax revenue, because it results in fewer people selling their assets to avoid triggering the tax. This has the effect of locking wealth into certain asset classes, reducing the flow of capital into the economy.”
Gilts yields fell initially then rose
Yields on 10-year gilts fell initially when the Budget was announced but then shot up during yesterday afternoon, in anticipation of increased government borrowing.
Shamil Gohil, fixed income portfolio manager at Fidelity International, said: “With £20bn more of issuance pencilled in skewed to the long end, that will lead to some curve steepening.”