Forewarned is forearmed
Memories of the dramatic market response to the ‘mini-Budget’ two years ago prompted caution from the new Government in terms of managing expectations. The hikes in National Insurance on pension contributions from employers, as well as capital gains tax and inheritance tax were all well signposted, such that the UK stock market, pound sterling, and UK bond market had already absorbed much of the anticipated negative news. In fact, now that we have clarity, we have seen a broad rally across UK smaller company stocks with the main large cap index also erasing most of its earlier losses. Sterling has appreciated modestly against the US dollar and gilt yields are lower in both absolute and relative terms, falling from their recent multi-month highs, as investors realise that their concerns around increased UK borrowing costs have not materialised.
Wrap up well
The changes to capital gains tax (CGT), which is levied on gains made when selling shares, second properties and selected other assets, were well illustrated. The lower rate of tax has risen from 10% to 18%, and the higher rate from 20% to 24% with immediate effect, while the rates on residential property will remain at 18% and 24%. Although viewed by some as an ‘easy win’ in terms of plugging the fiscal black hole, the move raises concerns about disincentivising investment. However, we view this as an opportunity to recalibrate financial plans, focusing on the importance of tax wrappers like ISAs and pensions, which protect investments from tax on both capital gains and dividends.
AIM higher
There was much speculation around the possibility that inheritance tax (IHT) exemptions for shares on the Alternative Investment Market (AIM) would be removed. With around 15% of AIM liquidity coming from IHT fund solutions, the potential impact of removing AIM business relief could have caused as much as a 30% drop in the junior market’s stock prices. Instead, the IHT break for AIM has been only partially abolished with 50% relief from IHT set to be applied to its shares from April 2026. Investors had priced in the worst-case scenario and as such reacted favourably to the news with AIM up 3.21% on the day, as at time of writing.
London listed, international operations
The Chancellor increased the National Insurance rate for employers by 1.2 percentage points to 15%, from April next year and lowered the threshold at which employers start paying the tax from £9,100 per year to £5,000. This of course could translate into a significant cost to employers, potentially impacting the bottom line for swathes of UK domestic companies. It is worth keeping in mind, though, that a majority of FTSE 100 companies have operations that generate much of their revenue outside the UK, limiting the impact of the UK Budget in general as well as potential increases in employer National Insurance contributions specifically.
Housing matters
The property market is still stabilising following the spook in the market when the 2022 mini-Budget proposed unfunded tax cuts. So, it was paramount that the new Government provided much needed stability and investment in the planning and built environment sector in the Budget. One of these measures includes a £500 million top up for the Affordable Homes Programme (AHP) and consulting on a five-year rent settlement for social housing providers, which could help boost the share price of top UK house builders.
UK Dynamic Fund
While the UK market sold off around 0.50% after the budget, the Chancellor’s positive outlook for the UK’s finances and economy went down well with more domestically focussed, mid-cap names. Our UK Dynamic fund remains tilted towards this area of the market, seeing more attractive valuations and better prospects for earnings growth. The fund also has a small amount of exposure to the AIM market. As mentioned, the junior market rallied strongly on news that IHT relief will be maintained, albeit at a lower level.
