By Sinead Cruise and Naomi Rovnick
LONDON (Reuters) – Higher capital gains taxes (CGT) could give British risk-averse savers another reason to avoid British shares, fund managers and advisers say, potentially hurting the British economy more than a looming exodus of tax-shy multi-millionaires.
Speculation about Prime Minister Keir Starmer’s budget roadmap, due on October 30, has dominated headlines since he said taxpayers with “broader shoulders” should help plug a 22 billion pound ($28.58 billion) hole in the public finances fill.
Taking a bigger share of investment profits is one way Starmer could plug the void. It is also being explored whether more tax could be exacted from elite entrepreneurs known as non-doms, who live in Britain but pay little or no UK tax on foreign wealth.
Some non-doms have threatened to leave Britain in protest, fueling market fears over asset sales and the size of their future contribution to UK tax revenues, which are expected to hit almost £9 billion (11.6 billion) by 2023. billion dollars), according to data from Oxford Economics.
But raising CGT, which investors pay based on stock market gains, is a bigger economic gamble for the government than upsetting the super-rich, especially given Britons’ already meager appetite for UK shares and a worsening pension savings crisis.
UK share returns have struggled to keep pace with global peers since the 2016 vote to leave the European Union. More than $100 billion net has flowed from British equity funds in the past four years, according to data from the London Stock Exchange.
“You’re asking the average man or woman who is already risk-averse and doesn’t want to invest in stocks to now have to give up a lot more of their profits,” said Shaniel Ramjee, senior investment manager at Pictet Asset Management.
“This defeats the purpose of creating long-term financial security for the population.”
Eren Osman, managing director of asset management at Arbuthnot Latham, said his firm was advising wealthy clients to cut their UK stock positions, reversing a buy recommendation made just before the July 4 general election.
A spokesperson for the British Treasury did not immediately respond to a request for comment.
“DOOM LOOP”
While it is common for the financial sector to warn about the unintended consequences of tax reform, fears of a ‘doomsday’ in the UK stock markets have increased.
Although CGT rates in Britain are already lower than nominal rates in most European economies, including France, Germany and Italy, demand for domestic equities, considered essential to a thriving economy, continues to fall.
Pension funds and insurers owned 45.7% of all shares listed in Britain in 1997. This level has fallen to a record low of 4.2%, according to the latest survey of ownership by the Office of National Statistics.
Fund managers said any tax increase that raises the cost of risk for shareholders could make it harder for UK companies to tap the funding they need in the capital markets, including ‘mom and pop’ or retail investors who are at risk later in life financial problems. .
Working-age adults who avoid stock investments are likely to have smaller pension pots than those who don’t, because stocks offer higher long-term returns than bonds and have greater potential to beat inflation.
Data from Barclays shows that 13 million British adults – who already have more than six months’ worth of rainy day savings – are sitting on £430 billion of ‘possible investments’ in cash.
The rhetoric of troubled public finances and a tougher tax regime has eroded confidence across the wealth spectrum, Nick Lawson, portfolio manager at Julius Baer International, told Reuters.
Lawson said some clients had already cashed in their gains on UK shares to avoid higher tax bills and possible losses from wider market forced selling if the rises are confirmed.
Canaccord Genuity fund manager Eustace Santa Barbara said budget uncertainty was exacerbating the shortage of capital available to already deprived UK companies.
According to the Capital Markets Industry Taskforce, the UK economy needs additional investment of £100 billion per year over the next ten years to support economic growth of 3%.
But UK equity funds reported outflows of almost $6 billion in September alone, putting them in the bottom ten of all fund categories Lipper tracked this month.
Raising the top tax brackets could be unpopular even among those who may never be subject to that tax, said Kevin O’Shea, director of wealth planning at RBC Wealth Management.
“Limiting that ambition for the wider population could reduce the incentive to innovate and take risks, which could have wider consequences,” he added.
Concerns about CGT increases have already prompted one in four entrepreneurs to accelerate exits from business in the past 12 months, research from Evelyn Partners found, which could extend a multi-year lull in UK stock market activity.
“The real risk here is that this could send a chill through retail investors of all asset classes,” said Antonia Medlicott, CEO of Investing Insiders.
“The government needs to strike a balance so that these changes do not inadvertently deter those they are trying to convince to invest more,” she said.
($1 = 0.7699 pounds)
(Reporting by Naomi Rovnick and Sinead Cruise, Editing by Barbara Lewis)
