Trick or Treat? How the Autumn Budget conjured a few surprise

31 October 2024 — It could have been worse. That seems to be the prevailing verdict on the Budget measures announced yesterday. Yes, there was difficult news on capital gains tax for stocks and shares, on the inheritance tax treatment of AIM shares and unspent pensions, and for certain sectors, but Budget 2024 was better than the gloomiest predictions had expected.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

Take the AIM market, for example. For months, investors had been holding out on the AIM market in fear that the favourable treatment of AIM shares for inheritance tax (IHT) would disappear completely. As it was, Chancellor Reeves said that instead of being fully exempt from IHT, AIM shares will now be charged at 20%.

Certainly, the FTSE AIM market had anticipated worse and staged a relief rally, up 4% on the day*. Fund managers also breathed a sigh of relief. Anthony Cross, manager on the Liontrust UK Micro Cap and UK Smaller Companies funds, said: “In announcing the 50% IHT relief, it recognises the vital role played by this market in the UK’s economic growth and puts the question over its removal to bed for the foreseeable future. Despite the market rallying 4% today, there remains a huge valuation opportunity and upside in investing in AIM – these companies are not valuable because of their tax treatment but because of their underlying fundamentals.” It's good news, but only because it could have been worse.

It’s a similar situation with pensions. It is no longer possible to pass on unspent pensions free from inheritance tax. This is a blow and could require some to revise their tax planning strategy, which may have been built around spending their pension last in order to preserve as much as possible for their heirs.

However, in the context of a stream of news flow on the end of higher rate tax relief for pension contributions, it didn’t seem such a tough option. Many people do not have the luxury of choosing when to use their pension in retirement and higher rate tax payers will be grateful that they can continue to claim tax relief on their contributions as before.

Capital gains tax rise

The rise in capital gains tax (CGT) on shares, bringing it into line with that for second properties, was also lower than the worst predictions had suggested. There had been fears that all capital gains tax would rise in line with income tax. As it was, CGT will be 18% for lower rate tax payers, up from 10%, and 24% for higher rate tax payers, up from 20%. The annual allowance also remains the same. This is a significant rise, but in the context of having to pay 40% or 45% on all capital gains, it seems reasonable.

Equally, after all the debate on what constituted a ‘working person’ and clarity that it didn’t include people who owned shares, it was a relief to see no changes to the fundamental building blocks of a long-term savings strategy. ISAs were untouched, and allowances remained the same. Pensions are also intact, though the government has launched a major pensions review in August, so there may be changes further down the line.

Sectors under fire

That’s not to say it was universally good news. Oil and gas companies will pay a higher windfall tax, with the Chancellor confirming that the government will increase the rate of the Energy Profits Levy (EPL) from 35% to 38%, and extend it until 31 March 2030. It had originally been due to end in 2029. The share price for BP and Shell barely moved on the news, but this needs to be set in the context of broader weakness over the past month.

The lion’s share of the £40 billion tax rise will come from a £25 billion rise in employers' national insurance contributions. The amount businesses will pay on their employees' national insurance contributions will increase from 13.8% to 15% from April 2025. Combined with the decreases level where employers need to start paying tax from £9k to £5k and the significant 6.7% rise in minimum wage (£12.21 per hour, up from the current rate of £11.44) we expect these changes to lead to job losses in the hospitality, retail and leisure sectors who are expected to face an increased annual tax bill of £3 billion in 2025.

There was good news for those businesses deemed to be ‘growth industries of the future’ – though like ‘working people’ the definition was studiously vague. There was nearly £1bn for the aerospace sector, over £2bn for the automotive sector and up to £520m for a new Life Sciences Innovative Manufacturing fund. There was also support for research in engineering, biotechnology and medical science sectors.

Green energy remains a focus for this government, with the government announcing new investments into carbon capture and storage, plus 11 new green hydrogen projects. There was also £3.4bn to increase energy efficiency in homes.

This is likely to be a more benign environment for renewable energy companies. Phil Kent, CEO of Gravis, which runs the VT Gravis Clean Energy Income and VT Gravis UK Infrastructure Income funds says the list of new projects is encouraging, but adds, “it feels somewhat unambitious given the scale of investment needed to deliver on binding obligations in the UK’s sixth carbon budget and the 2030 grid decarbonisation objective. For example, £125m for GB Energy is small when compared with the c. £65bn needed to deliver on the 140 GW of installed renewable capacity (up from c. 57 GW) committed to as part of Labour’s manifesto.

“A 10-year infrastructure strategy will be published in the spring of 2025 and a ‘Clean Power 2030 Action Plan’ has also been committed to. Both are expected to contain more detail than has been provided today on how Labour’s commitment to decarbonise the electricity grid by 2030, and support wider infrastructure deployment, will be achieved.”

Gilt markets

The final piece of the puzzle is the impact on gilt markets. Chancellor Reeves’ top priority will have been to avoid a Liz Truss-style hit to the debt markets, sending gilt yields (and therefore borrowing costs) soaring. She seems to have achieved this.

After rising for many days into the budget gilts initially rallied to 4.20%**. However, after the government published its spending and gilt issuance expectations yields sold off aggressively. Yields moved by 25bps in an hour, a big move. The gilt market is currently quite volatile and the market is nervous about the government's spending plans and whether the tax rises which actually raise as much as the government thinks. 

Strategic bond managers such as Arial Bezalel on the Jupiter Strategic Bond fund continue to back UK government bonds***. Certainly, rate cut expectations do not look particularly optimistic at these levels.

Overall, it was never likely to be good news and markets will take time to digest the impact on Reeves’ first Budget. However, if Reeves is genuine in her commitment to a ‘one and done’ tax rising budget, it may be that this is the point of peak pain – and it’s not as painful as it could have been.

*Source: FTSE AIM All-Share, 30 October 2024
**Source: UK 10 Year Gilt, 30 October 2024
***Source: Jupiter, Positioning bond investments for steep rate cuts, 24 October 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.