Executives are offloading shares, investors are adjusting their bond portfolios, and some business owners are even accelerating planned liquidations ahead of Labour’s first Budget in 14 years.
People are taking steps to reduce their exposure to what could be the largest tax-raising Budget in a generation, with chancellor Rachel Reeves expected to outline plans to fill a £40bn gap in public finances — causing business confidence to drop to an 11-month low.
“It’s an unusual Budget where we know what’s not coming,” said Laura Foll, a portfolio manager at Janus Henderson, referring to Labour’s promise to avoid reforming employee national insurance, income tax, and corporation tax. She added that this has led to predictions of other changes: “People are filling the void.”
Director share sales
Executives have increased their sales of shares in UK-listed companies ahead of the Budget, with Reeves expected to raise capital gains tax (CGT) on October 30. She is likely to raise the 20 percent rate charged on the sale of shares by several percentage points, according to former Treasury officials.
Since the July 4 general election, directors of listed companies have been selling their shares at an average rate of £46 million per week, more than double the pace of £22 million in the previous six months, as shown in regulatory filings.
The total value of disposals since election day has reached about £688 million, according to figures compiled by Investors’ Chronicle, a weekly magazine for private investors.
Several executives who sold their shares told the Financial Times earlier this month that they made the decision due to concerns about the Budget. “My sale was purely due to concerns about the CGT changes,” said one executive at a London-listed group.
Gilts
Big investors in UK government bonds have been closely watching for signals on changes to the country’s fiscal rules, with gilt buyers examining various balance-sheet measures and the complex process of valuing public sector assets.
Reeves confirmed on Thursday that the UK would change its fiscal rule, and people briefed on Budget discussions said the government would move to a broader measure of its net debt, public sector net financial liabilities.
Concerns about additional potential borrowing have contributed to a sell-off in the UK’s long-term debt, pushing the 10-year gilt yield up to 4.3 percent from 3.75 percent in mid-September.
However, some investors believe UK government bonds are currently undervalued and are betting on a “relief rally” once fiscal uncertainties are resolved. Barclays strategists recommended tactical long positions on the UK’s long-term debt, saying that “pessimism about the Budget is too high.”
Meanwhile, retail investors have been buying short-dated gilts that are trading below face value to minimize their tax exposure.
Winterflood Securities, a government-appointed dealer for UK debt, reported a 25 percent increase in trading volumes for fixed income this year, with short-dated gilts due in January 2025 and January 2026 among the most popular options for investors.
Although interest payments are taxed as income, price movements are exempt from capital gains tax, with most of the returns on gilts that trade below face value and are held until maturity derived from capital gains.
Aim market
The possible elimination of inheritance tax relief on shares listed on London’s junior stock exchange has weighed on the index since the election.
Shares in the market have fallen 10 percent since former Prime Minister Rishi Sunak called the election on May 22. A sharp decline this month reflects a sell-off driven by the impending Budget, according to wealth managers. Aim’s performance since election day has been compared to a 0.5 percent increase in the domestically focused FTSE 250 index.
Some fund managers fear that removing the tax break would be devastating for Aim and could spell the end for the market. However, the London Stock Exchange has stated that it would be “painful” but not fatal.
Approximately 10 percent of the capital invested in Aim companies is held in funds specifically targeted at customers seeking to reduce their tax liability, according to Marcus Stuttard, head of Aim at the LSE. The junior market’s total capitalization is close to £64 billion.
Jess Franks, at Octopus Investments, believes that Aim should be seen as “one of the big success stories” of the past two decades. “It has encouraged suitable investors to take more risks with some of their capital,” she said.
Voluntary liquidations
Some business owners have begun winding up their companies, with the number of voluntary liquidations so far this month surpassing 1,600, according to legal filings. This is more than double the 750 voluntary liquidations in October last year, but still only a small fraction of the 5.6 million businesses in the UK.
The surge in activity comes as Reeves considers eliminating entrepreneurs’ relief on a sale or liquidation — which allows business owners to pay 10 percent instead of the more common 20 percent for higher rate taxpayers.
Evelyn Partners, a wealth management group, reported this month that nearly a third of the 500 business owners it recently surveyed who had accelerated their exit plans over the past year had done so due to concerns about a potential increase in CGT.
Retail investors
Many individual investors are realizing capital gains at the current 20 percent rate on their holdings in a general account.
Hargreaves Lansdown, the UK’s largest investment platform, stated on Tuesday that clients had been selling investments in September, partly driven by potential tax hikes. It noted that client cash balances increased to £12.7 billion in the second quarter, up from £12.3 billion in the previous quarter.
Some individuals are repurchasing shares in tax-efficient individual savings accounts to shield cash from capital gains and dividend taxes. The company reported a 44 percent increase in the number of people requesting transfers so far this year.
However, this strategy is limited by individuals’ £20,000 annual personal tax-free allowance.
Additional reporting by Ian Smith and Emma Dunkley