The question being asked of yesterday's budget was tax and spend or just more spend? It was mostly the latter, with tax decisions made but largely deferred. Here are views from across the sector on what the Chancellor's budget delivered.
Wealth managers reacted yesterday to UK finance minister (aka Chancellor of the Exchequer) Rishi Sunak's Budget measures that included a sharp hike in the corporate tax rate from 19 per cent to 25 per cent, beginning in 2023 - probably the most surprising measure. The UK has enjoyed some of the lowest corporate taxes among wealthy nations - albeit with relatively few allowances - and, as the US is on track to raise its rate to 28 per cent, the UK should remain the lowest in the G7 club of nations. Even so, the UK is less competitive than it was, business leaders warned. Economists estimate that each percentage rise in corporation tax will net the Treasury an extra £3 billion ($4.18 billion) annually, and go some way to plugging the big hole in national finances.
Sunak added a further £65 billion to government spending to take the total spend since the start of the pandemic to £407 billion, or 18 per cent of GDP. The Office for Budget Responsibility's downward revision of the deficit from £394 billion in November to £355 billion was welcome news.
Also welcome was no appetite (yet) to raise the rate of capital gains tax. But managers expect that higher tax bills for UK companies will lead to reduced dividends to shareholders. They are waiting with interest to see how this plays out for investors, both in the level of investors’ income and on valuations generally.
The mechanics of yesterday were laying out a ‘three-part plan’ to lead the country out of the pandemic and into recovery. Foremost were committments to protect jobs and businesses, and help the worst hit sectors such as hospitality and retail by extending furlough, grants, business rates and VAT reductions.
To the relief of the wealth sector, the Chancellor has no immediate need for a wealth tax and opted instead for measures that would stimulate growth through investment.
Managers were also relieved that there weren't the sharp teeth some had feared. “There was no mention of a wealth tax, no wholesale reform to the inheritance tax regime, no sign of the increases in capital gains tax that were thought inevitable and an extension to the SDLT holiday," Tim Snaith, partner at Winckworth Sherwood said. "That is not to say that the door has now closed on these changes; in fact, we think it remains wide open and that the Chancellor will turn his attention to some of them in due course."
Paul Falvey, tax partner at BDO said the budget provided certainty for individuals and businesses coming out of lockdown. “From a personal tax perspective, there were no kneejerk reactions, with no fundamental changes introduced in haste. He was open and straightforward about the much-mooted “stealth” increases which was refreshing. Those who sold or transferred assets on the eve of budget day may feel they were bitten by the dog that didn’t bark, with “tax day” on 23 March likely to reveal long-term tax policy,” he said.
He thought introducing a ‘super deduction’ worth an estimated £29 billion over the next four years was squarely aimed at spurring investment. "This will likely benefit industries such as infrastructure, manufacturing, utilities and construction. It will be interesting to see to what extent this encourages short-term investment for sectors that generally take a longer term view of investment decisions. The Chancellor will hope it encourages them to take a less cautious view of their medium[-term] economic prospects."
Falvey was suprised there was no mention of taxation of digital Big Techs. "Whilst the corporation tax increase will ensure that profitable businesses will pay more – an estimated £48 billion extra over the four year period to 2025/26 – many digital organisations have flourished during COVID-19. This gap needs to be bridged."
The OBR has calculated that the super reduction would lift business investment by 10 per cent. According to AXA IM's David Page, it is by far "the costliest of the longer-term support measures" and a greater giveaway than the total expected gains from removing threshold indexing, he said.
Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank, also found the ‘super deduction’ notable. “The 130 per cent reduction in costs for companies that invest is quite unheard of for a UK government. It could boost capital expenditure and perhaps also lift growth more structurally over the longer term.”
There was no real news for private clients as the Chancellor stuck to his triple tax lock. "Although the freezing of personal allowances and higher-rate tax brackets at 2021/22 rates (£12,570 and £50,270) will increase the tax take," Rebecca Durrant, head of private clients at Crowe said.
Commenting on potential future tax rises, Dean Moore, managing director, head of wealth planning at RBC Wealth Mangement said: “From a private client perspective, fiscal drag on personal allowances and IHT thresholds will have a limited impact, with the key areas of pension tax relief, annual and lifetime allowances, IHT rates and continuing ability to make substantial gifts and CGT remaining unchanged.
“This was essentially a “feel-good” budget while the UK economy remains in recovery mode, but there’s no getting away from the debt that COVID has created. It was clearly positioned that with a projected £2.1 trillion UK public sector net debt burden, there will be tax rises to come, and the areas previously flagged as being a focus of tax increases are still in play.
He said the budget reinforces the need for investors to get their house in order and to make use of the current gifting allowances and CGT rates, especially when considering legacy and next generation planning.