Originally published at: Budget 2024: Everything investors need to know – InvestEngine Insights
Today (Wednesday 30th October), Chancellor of the Exchequer Rachel Reeves delivered Labour’s first Budget in 14 years.
The Budget was perhaps the UK’s most eagerly anticipated in decades, with Reeves promising a bold new vision for Britain while taking strides to rebuild the country’s finances.
What this means in practice is billions in tax hikes and additional spending, along with cuts to some areas. The Budget was the first in what Keir Starmer has described as “painful” decisions to plug what Reeves called a “big gap” in the country’s finances.
Changes to ISAs
One of the major announcements for investors is that nothing is changing for ISAs.
There was speculation in the lead up to the Budget that Reeves would impose a £500,000 lifetime cap on the investment wrapper – particularly following the Prime Minister’s comments that those with shares are not ‘working people’ – but no such change was announced.
With people in the UK struggling to invest enough to secure their financial futures, ISAs are a vital tool to help remedy the situation.
22 million people in the UK invest into an ISA, and the lack of any kind of lifetime cap is a recognition of their importance in helping people build for the long-term. This announcement is particularly important given the capital gains tax hike.
Capital Gains Tax
One of Labour’s clear aims for this Budget was to raise government income. One of the levers pulled by Reeves is an increase in Capital Gains Tax.
The scope of the tax was increased by the previous government, who reduced the annual exemption from £12,300 pre-April 2023 all the way down to £3,000 from April this year. It’s a tax that affects less than 1% of the adult population in the UK, but raises a significant amount of the treasury.
Reeves’ announcement retained the levy for selling property at 24% but increased the rate on profits from shares and other assets from 20% to 24%. It’s important to remember this only applies to profits over the £3,000 exemption limit.
For investors, the hike only makes the use of an effective tax wrapper like an ISA more important. Investors can put up to £20,000 into an ISA each tax year and pay absolutely no capital gains or income tax on the profits they make from their assets.
Fractional shares
Some more good news for investors came in the form of clarity around fractional shares and their use in ISAs.
In the run up to the Budget, there was speculation that fractional shares would be considered non-compliant for ISAs – fortunately for investors, but the news that broke earlier in the month that fractional shares would remain ISA-compliant.
The ability to buy a fraction of a share is integral to ETF investing and diversified investing more broadly, so this is a decision investors should welcome. Fractional shares have enabled more people than ever before to own a stake in and benefit from the success of some of the world’s biggest companies.
This decision will ensure that investing remains accessible for millions of people in the UK, while enabling them to better secure their long-term financial future.
Reduced level of Inheritance Tax relief on AIM shares
The decision to reduce the inheritance tax relief from AIM shares underlines the challenges facing investors when it comes to building diversified, long-term portfolios across regions and markets.
Rather than incentivising investment, policies of adding and removing tax perks encourage decisions to be made predominantly on the tax treatment of certain stocks rather than their overall performance.
This change helps encourage people to invest in funds based on their long-term investment merits, not their tax status.
How investor portfolios may be affected
So, how might Labour’s first budget in 14 years affect markets (and portfolios)? Well, firstly, nothing is certain when it comes to markets, particularly over the short-term.
The market’s response to the speech was mixed. The FTSE 100, an index of the largest UK companies, remained flat after Chancellor Reeves’ speech, with larger companies being largely unaffected by the changes.
The AIM index, however, reacted positively. The smaller market had fallen over 6% since the start of this year, partially fuelled by fears over the Labour government removing the inheritance tax relief which had applied to direct investment in companies listed on the AIM.
The chancellor clarified today that IHT would indeed now be applied to AIM shares, but at a 50% reduced rate of 20%. The AIM market reacted positively to this news, rising almost 4% immediately following the speech – expressing its relief at not having the full IHT rate applied.
The bond market impact was muted – a welcome relief compared to the disastrous mini-budget of 2022. While 10-year gilt yields had risen to around 4.3% leading up to the budget in anticipation of additional government borrowing, yields fell immediately following the budget, down to 4.2% – indicating the market is now less concerned about the state of the UK’s finances.
As for the potential impact going forwards, the UK holds less sway on global markets than it once did, meaning any negative effects of the Budget are unlikely to cause any major ripples internationally.
Generally speaking, a long-term, diversified approach makes announcements like these less significant than they might seem. The important thing for investors here is to avoid home country bias where possible and keep a sensible UK exposure as part of a wider investment portfolio.
Important information
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.