Equity Research; October 30th BUDGET- ALERT

October Budget

There has been considerable concern and trepidation expressed ahead of Chancellor Rachel Reeves first Budget on 30^th October 2024. Rightly so.

Following a landslide victory on 4^th July 2024 that represented a vote for change in its purest sense, the Labour leadership has to steer between delivering towards change expectations whilst not scaring the horses. Confidence is a fragile thing and if the wrong people perceive an anti-capitalist agenda, Heathrow will fill up quickly.

A wealth exodus should be taken seriously by the new government as its fund raising plans are dependent on a tax base that remains in the UK.

The Labour manifesto promised a ‘tax lock’ i.e. not to increase taxes on ‘working people’ taken to mean no changes to income tax, national insurance or VAT. This leaves limited scope for major changes to personal taxation. However the manifesto also talks about ‘full funded plans’ and goes so far as to make the following ‘fiscal rule ‘ …..’the current budget moves into balance so that day to day costs are met by revenues’.

If the UK government moves to ‘cash neutral’ broadly speaking, where income and expenditure are in equilibrium then what are the implications? For the last financial year ending March 2024 the UK current budget deficit was £52.1bn. The Office of Budget Responsibility estimates the current budget deficit will be £20.7bn for the March 2025 year, prior to recent NHS and other public sector pay awards costed roughly at £9.4bn with most pay increases, army, teachers in the 5.5%-6% bracket.

Chancellor Rachel Reeves is likely to take the view between £20bn- £40bn must be raised via new fiscal measures to meet the manifesto commitment. Our expectation is Reeves will aim near the middle, but likely north of £30bn.

‘Known unknowns’

Despite all the supposed news ‘leaks’ and ‘scoops’ around the Budget, arguably at unprecedented levels, it is worth clarifying that until 30^th October there are some ‘known unknowns’.

1. Which rumours are true or false
2. The timetable for implementation of budget changes
3. Changes to the annual allowance, reliefs and ISA incentives
4. Changes to IHT thresholds
5. How pension contributions will be treated
6. Allowances and loss carry forwards

Who is vulnerable and/or within the decision framework?

1. Capital Gains Tax on shares and second home gains – the PM recently poured cold water on speculation of 39% capital gains tax rates on the gains from the sale of shares and second property. The last government cut the top rate on property gains to 24% from 28%. The OBR mentioned that cut in rates increased taxes by £700m due from second home sales due to higher volumes of sales and stamp duty impact. However increasing the tax rate is likely to lead to a significant drop in second home sales, particularly in an environment of lower mortgage costs, making a hike possibly counterproductive to revenues.
   However the 20% CGT rate on the sale of shares, carried interest, and other collectible items is likely to change considerably with the aim of increasing the annual £15bn in tax receipts to possibly around £25bn i.e. a £10bn hike. This would suggest a rate above 30%.
2. Employers National Insurance– this has been well trailed with no real government denial or push back at all. The PM has repeatedly clarified the national insurance commitment in the manifesto and during the campaign was made in reference to working people only. A hike of 1% to 14.8% we see as likely to raise £8.5bn.
3. National Insurance on Pension contributions – there has been speculation that Chancellor Reeves will introduce National Insurance on pension contributions, however we think this unlikely at this stage.
4. Pension Tax Relief – whilst in opposition Rachel Reeves MP supported a flat rate of tax relief on pensions as opposed to tax relief on both higher rate (40%) and additional rate (45%) tax payers. 63% of this relief accrues to higher rate/ additional rate payers. If the relief is limited to 20% on the first £60,000 this would be a considerable change. Limiting up-front relief to the basic rate would equate to a £15bn tax rise. This move has 50% probability in our view.
5. Bringing private pensions within scope of IHT – currently exempt from the IHT calculations, a change in the IHT treatment of pensions would boost IHT revenues currently c. £7.5bn p.a. possibly increasing the take by around £2bn. However we think this unlikely at this stage.
6. Fuel Duty- is a significant revenue for the UK government at £24.7bn p.a. The current tax regime has been in place since 2011 with the current rate is 52.95p per litre. This is an equitable measure, i.e. a broad impact at about £850 p.a. / household and is in our view this is a vulnerable / likely measure. A 11.05p hike in fuel duty to 63p would bring in around £4.5bn.
7. Gambling Sector– recent suggestions at measures (a hike to 15% general betting duty on bookmaker terrestrial profits to 30%) alongside remote duties (a levy of 50% from current 21% levy) that would increase gambling taxes by around £3bn have not been denied by government sources. More modest hikes could add easily £1.5bn and is likely in our view.
8. VAT on public school fees: this measure will raise £1.5bn p.a. and has been proceeding though Parliament. Our view is this is a likely measure.
9. Reliefs on AIM companies; there has been speculation of changes to business relief on AIM shares i.e. bringing AIM listed assets within the scope of IHT. According to Peel Hunt such a move could lead to a 20% decline in AIM valuations. Overall a transition to new taxes could do more harm than good to the junior market, which has tangibly struggled in recent years to get new companies onboard. We view this as unlikely at this stage.

We get to around £33.5bn overall if these tax hikes occur as envisaged.

Conclusion

We expect the new Labour government will make significant changes to the tax landscape and that opportunity is politically open after almost a decade of lost opportunities and mis-steps with first Brexit then C-19, wars, consecutive failed governments etc.

The new PM and other ministers have said this will be a tough Budget and that is on the cards. Whilst inevitable and almost certainly priced in, it is better all round to get this underway quickly.

A move to balance the UK’s books and reduce the UK borrowing requirement will be viewed positively by investors in sterling assets. It should lift gilt prices and lower market interest rates. A credible Budget that raises revenues without derailing the UK’s growth trajectory would be viewed as drawing the line under the significant uncertainty that has been building since the July election.

We have given our views on the areas that are vulnerable to higher taxes however this is not an exhaustive list. There will be other wrinkles for sure. It will certainly be interesting to see how the cookie crumbles on the 30^th October!