The government’s reported plan to scrap the 0.5% Stamp Duty on share purchases has split opinion across the City, with supporters saying that removing the levy would make London more competitive and draw investors back to domestic shares, while sceptics argue that no minor tax cut can fix years of weak sentiment and policy drift.
This is the position of Richard Staveley, manager of the Rockwood Strategic Trust, who said that the impact of Stamp Duty is overstated and its removal is “unlikely to be a long-term catalyst for reversing net withdrawals from UK equities”.
As a cost on UK equities, it’s relatively modest, he argued, particularly if investors hold a stock for long enough, where the potential rewards outstrip a 0.5% initial charge for the transaction.
“I can see the argument, but if you buy a stock and pay a bit of Stamp Duty and sell it in five years’ time to 100% return, I think that’s doable,” Staveley said.
On top of this, removing Stamp Duty does not guarantee greater interest from investors. For example, he noted that the tax is not paid on AIM [the Alternative Investment Market of the London Stock Exchange] shares, but the market has been “steadily declining” for years all the same.
“Indeed, companies are gradually moving to the main market, where they will pay Stamp Duty,” meaning it must not be the limitation people think, he said.
Additionally, removing it would primarily benefit short-term market traders and high-frequency approaches, which are not supporting UK businesses in the long term. If these participants are encouraged to trade more, share prices are much more likely to reflect short-term concerns rather than actual fundamentals, which is a dangerous precedent to set, he explained.
Other managers did not share his view. Alan Dobbie, co-manager of the Rathbone Income fund, argued that the removal of Stamp Duty would be a constructive development.
UK equity markets still need plenty of help to reach their full potential, even after this year’s rally, when the FTSE All Share has surged 16.6%, he said. The 0.5% tax singles out the UK market as an “outlier on the global stage”, when most of its competitors do not charge investors for purchasing shares.
When the FTSE is competing with all other markets in terms of where investors choose to put their capital, even a small cost can make people question if they want to buy UK equities, which could limit the rally from continuing over the long term, he argued.
“It’s a friction that’s unnecessary in a market that’s already unloved,” Dobbie said.
Fund managers also struggled to agree on which other reforms would incentivise more investment in the UK.
The most “obvious reform” is to repurpose the existing ISA allowance, which should be “solely for UK-listed shares and investment trusts” to encourage people to invest in these assets. This will do more for the market than removing the fractional cost of Stamp Duty, he argued.
However, James Harries, co-manager of the STS Global Growth and Income trust, argued this is “putting the cart before the horse”.
“I’m not in favour of corralling capital into the UK through pensions or UK ISAs, I don’t think it addresses the core issues,” he continued.
Interest in the UK market has declined for a variety of reasons, partially due to the decline of the currency and the fact that many businesses have been moving out of the UK to the US.
“Making the UK more attractive as an investment destination relies on changes in taxation regimes, incentives, etc.”
A mandated UK ISA or requirement for pensions will do nothing to address the lack of confidence investors and businesses have in the UK, he argued.
Meanwhile, the manager of the BlackRock Smaller Companies Investment Trust Roland Arnold said he would prefer to see the government take a step back during the upcoming Budget.
“It’s not about the government nudging things, it’s that they should stop doing things.”
The big issue with 2024’s Budget and with the upcoming autumn Budget is that due to the chancellor’s fiscal rules, they are “forced into marginal taxes on discretionary items” such as investing.
This has created a situation where people are hesitant to invest, because they are never entirely sure if the Budget will change inheritance tax or ISA allowances, he concluded.