George Osborne’s first Budget was a confusing one for most investors. Should they have been cursing the Chancellor for increasing the capital gains tax (CGT) rate for higher earners? Or should they have been breathing a sigh of relief that the increase wasn’t much bigger?
What will the Budget mean for the UK stock market, the bond market and other types of investment? Should investors be switching their money out of some assets and into others?
To help to answer these questions, Times Money asked a panel of financial experts to give their views on what the measures announced in the emergency Budget mean for investors.
Justin Modray, candidmoney.com
“The Budget tax rises and spending cuts will mean that most of us have less disposable income, so I would expect to see a fall in overall levels of saving and investing. The increase in CGT for higher-rate and top-rate taxpayers will also act as a small deterrent to investing, but I doubt that it will make a significant difference.
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“The Government’s tough stance on reducing the deficit has been welcomed by gilt markets but met with indifference by stock markets. The squeeze on disposable incomes could hurt many companies if it means that we spend less, so the threat of recession still looms large.
“Greater confidence in the UK could boost sterling. Good news when buying foreign goods or going on holiday, but less welcome if you own overseas investments or earn money abroad, as most UK stock market companies do.
“Overall I think we’re in for a tough few years. Stock markets and property are more likely to fall than rise and most of us will have less surplus income to salt away for the future. However, provided that we can get through this enforced period of austerity intact, then medium-term prospects are quite promising because our economy should be leaner and meaner as a result.”
Mark Dampier, Hargreaves Lansdown
“The UK stock market is as much, if not more, attuned to what is going on around the world than it is purely to UK news, so the Budget will not have a huge impact on market sentiment.
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“By taking money out of the economy the Budget is likely to have a deflationary effect. This will help to keep interest rates low for the time being and should be good for bonds.
“One of the really crucial items for investors was the raising of CGT for higher-rate taxpayers from a flat 18 per cent to 28 per cent. It’s a wake-up call to all taxpayers that they should be saving as much as possible in tax-sheltered investments such as pensions and individual savings accounts (Isas).
“The annual Isa allowance is now £10,200 per person, so couples can tuck away £20,400 each year and from next year this allowance will be index-linked to inflation. This is a real no-brainer. Those people who were saying a few years ago that Isas were not worth investing in should have a rethink right now.
“Finally, though inflation and interest rates are likely to remain low in the short term, the vast amounts of money pumped into the economy over the past couple of years are slowly working their way through the system and could push inflation higher over the long term. As a hedge against this, index-linked savings certificates from National Savings & Investments look quite attractive, especially to top-rate taxpayers.”
Brian Dennehy, Dennehy Weller & Co
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“The Chancellor’s tough line on cutting spending to reduce the Budget deficit was welcomed by the bond markets and should give a boost to both government bonds, or gilts, and corporate bonds. But there are still concerns over financials, which make up a large part of the corporate bond market, because many are exposed to Greek and Spanish debt, and the Budget hasn’t altered that.
“The Budget measures will be less good for domestically focused UK shares, which will suffer from the large amounts of money that George Osborne is taking out of the economy. Smaller and medium-sized companies are likely to be harder hit because they derive more of their earnings from the UK and less from overseas.
“With UK plc struggling to increase profits, investors’ eyes will turn increasingly towards Asia and emerging markets, both of which continue to look attractive, especially now that many Asian stocks pay good dividends. But investors should remember that the influence of the Budget on UK share or bond markets can be overridden by global factors, such as the collapse of US banks in 2008 or the Greek crisis.”
Justin Urquhart, Stewart Seven Investment Management
“The tax rises and cuts in public spending will have a painful effect on the UK economy, which was already looking pretty weak. This is likely to be bad news for the FTSE 250 index, which is made up largely of domestic-orientated stocks. In contrast, the FTSE 100 contains a lot of international stocks, which are less affected by the UK economy.
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“With the Budget spending cuts putting downward pressure on inflation, bonds look a good choice for reasonable but fairly secure income. More adventurous investors who want greater international equity exposure than is offered by the FTSE 100 may want to explore Asian markets — but beware, they are already pretty fully valued. Those wishing to buy now should invest for the long term and may do better to wait until prices fall a bit.
“We are in for a decade of austerity so investors should take advantage of all tax-free investments.”
Patrick Connolly, AWD Chase de Vere
“High earners saving into pension schemes can take comfort from the prospect of a simplified system where they accept a much lower annual contributions limit in exchange for more generous rules on tax relief.
“The decision to index the annual Isa allowance in line with inflation from next year will be very welcome and should act as a further encouragement to investors to tuck away money in a tax-sheltered environment.”
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Case study: ‘We’ll divide share portfolio to avoid CGT’
Peter Alker, left, was relieved that the Chancellor resisted calls to cut the annual exemption on capital gains tax (CGT) from £10,100 to as little as £2,000. The 66-year-old retired agricultural supplier from Sidmouth, Devon, says: “If the exemption had been reduced sharply, that would have been a major concern.”
As it is, Mr Alker reckons that, by dividing their share portfolio between them and making use of their combined annual CGT exemption of £20,200, he and his wife, Valerie, 64, will be able to avoid paying CGT on any gains they make.
He adds: “I can see that some people will be disappointed that George Osborne didn’t reintroduce some form of indexation as a quid pro quo for raising CGT for higher-rate taxpayers. However, it would have been terrible if we had gone back to the levels of complexity that prevailed when we last had indexation. You would need an accountant simply to work out your indexation relief.”
Mr Alker is also pleased that the amount that can be put into an individual savings account (Isa) each year is to be raised in line with inflation. “My wife and I have been putting money into Isas for the past decade, investing in a range of M&G corporate bond funds and gilt funds,” he says.
“It has been a source of irritation that for much of the past ten years the Isa allowance wasn’t raised at all, which wasn’t much of an encouragement to savers. We are pleased that this is now changing.”