Tough financial decisions will inevitably be made in the first Budget of Labour’s current tenure, however abrdn is calling for policymakers to consider carefully any changes to ensure they do not rub against the need for a greater culture of saving and investing in the UK.
Here, abrdn, the global investment company, outlines its views on current Budget speculation as well as our asks of Government.
Inheritance Tax Relief on AIM-listed shares
abrdn recommendation: maintain current tax regime and provide certainty for the next 10 years
Abby Glennie, manager of the abrdn UK Smaller Companies Fund, says:
“The challenges facing UK Smaller Companies are troubling, but it is not the companies who are the issue – the quality and growth dynamics remain strong, and very competitive versus listed smaller companies markets globally. The problem is uncertainty.
“We need to attract more companies to list and get those in the hands of suitable long-term investors. Therefore, speculation around changes to IHT or Business Property Relief (BPR) could have a detrimental long-term impact on AIM-listed companies. This speculation comes at the worst possible time for UK smaller companies, as they’ve been battered by a decade of difficulties – from the collapse of their natural investor base (UK pension funds) to increasing regulation.
If rumoured changes lead the larger AIM-listed companies to move to a main stock market listing, the remainder of the companies on AIM will look a lot less attractive in terms of liquidity and investability.
It’s also crucial that if we do see any changes, that we get clarity on whether they will only impact future flows and whether existing assets in IHT funds will be protected.
If, as we hope, no changes are made then we’d like to have a guarantee that AIM’s tax status would be protected for a set period of, say, 10 years. On-going uncertainty about whether certain reliefs will be maintained or not will make it impossible for investors to commit to long-term decisions.”
Capital Gains Tax Reform
abrdn recommendation: if CGT rates do go up, this should not go too far. Either the change needs to be limited to avoid disincentivising investing or indexation should be reintroduced – meaning capital gains are only taxed after inflation is accounted for
Alastair Black, Head of Savings Policy at abrdn Adviser, says:
“We have had capital gains tax (CGT) and income tax rates aligned before – however previously there were mechanisms in place so that gains made because of inflation weren’t subject to tax. Our own research this year found that four people in 10 who invest directly in shares do not hold them in an ISA tax wrapper, extrapolating to 3.4 million retail shareholders. This means any changes to CGT rates could be hugely impactful.
Implementing such a change without some kind of indexation for inflation might have a detrimental effect on investing but also on passing on wealth to future generations. The higher rates may make gifting unpalatable for some and assets heavy with gains may end up being stockpiled until death rather than gifted and risk a double tax charge of both CGT and inheritance tax.”
Pensions taxation reform
abrdn recommendation: maintain tax-free lump sum and provide clarity on whether allowances already used up would be protected
Noel Butwell, CEO, abrdn Adviser says:
“A tax grab on pensions is no way to nurture a culture of saving, least of all when Government is trying to boost pension investment. Speculation is causing panic, particularly among those without a financial adviser, with a rush to take advantage of the tax-free lump sum. Hindsight is everything, but without a financial adviser, those who can least afford to make hasty decisions could be the ones nursing the most regret.
It’s precisely why we would urge against this rumoured change, which would serve only to undermine consumer confidence in pensions at a time when more people need to take responsibility for their own financial future and that of their loved ones. The worst outcome would be people choosing to opt out of pensions and long-term savings altogether.
We would encourage government to clarify now whether rumours to reduce the tax-free lump sum on pensions is under consideration, and if they will protect any allowances already built up.”
ISA reform
abrdn recommendation: simplifying the current, overly complex system
Alastair Black says:
“Lack of understanding is one of the biggest barriers to saving and investing. We and many others have argued that the ISA brand has been stretched too far. Having been brought in to offer a simple way for individuals to hold cash savings or invest in stocks or shares, it has seen multiple government interventions overcomplicate it. There are now several different types of ISA account catering to slightly different customer needs. This is key a barrier to engagement in saving and investing.”
Revitalising UK capital markets
abrdn recommendation: scrap stamp duty on UK shares, increase minimum pension contributions, and start a national conversation about investing
Stamp duty on shares
Abby Glennie says:
“Taxing an individual when they invest in a fast-growing UK tech company but not when they invest in a US counterpart, like Apple or Nvidia, is unfair and backward.
Stamp duty on UK share purchases constricts liquidity in the marketplace, leads to lower growth, and incentivises flows to other markets and products. It impacts private investors both directly and indirectly. Directly, investors pay stamp duty on UK shares purchases (including UK domiciled investment trusts). Indirectly, investors also ultimately bear the costs of stamp duty paid by asset managers within the funds and investment trusts that they manage.
Given the difficulties faced by UK smaller companies specifically, a stamp duty cut on companies outside the FTSE 100 would be a good place to start – followed by an extension of the policy to all listed UK companies.”
Increase minimum pension contributions
Alastair Black says:
“Millions of people are heading for an uncomfortable retirement because of inadequate pension savings. As we argued in our Savings Ladder Manifesto, Britain’s love affair with homeownership has left many people prioritising property wealth over pensions or other investments.
Auto-enrolment as a policy has significantly helped increase financial resilience, particularly for younger workers, but to avoid a future retirement crisis, we need to be saving more. The Government has committed to reviewing adequacy in the 2nd phase of their Pensions Review. Significantly increasing the minimum payment thresholds into defined contribution pensions is a policy which could make a big difference, on a phased and targeted basis.”
Start a national conversation
Sarah Moody, Chief Corporate Affairs & Sustainability Officer at abrdn, says:
“The government needs to start a national conversation around saving and investing which goes beyond standard cash savings and educates people on taking appropriate investment risk to deliver long-term returns. When people think of investment risk, they automatically think of the potential losses, but understanding risk within the context of regular investing can prove to be one of the most valuable habits to get into and can set you up for a financially resilient future. Better financial education, particularly in UK schools, would go a long way to helping tackle this problem over the long-term.”
