It could have been worse is the assessment of fund managers and represenatives as they survey chancellor Rachel Reeves’ tax rises and increased borrowing. 

James Henderson, manager of the Henderson Opportunities Trust (HOT ), Lowland (LWI ) and Law Debenture (LWDB ) investment trusts, was relieved to see the chancellor did not entirely scrap inheritance tax (IHT) relief on AIM stocks.

‘Before the budget people were saying that scrapping BPR [business property relief] would see AIM stocks fall as much as 30%,’ Henderson said. ‘We still need to see more done to revitalise AIM but the fact that the market actually went up afterwards tells you that the doom had been priced in and that scrapping half the relief is a lot better than many feared.

‘It also has to be put in the context of the imposition of IHT on pensions. Some may take the view that it is better to pay 20% IHT on AIM stocks than perhaps 40% on their pensions.’

In terms of stock holdings, the retention of capital relief for oil exploration companies saw Henderson’s position in small-cap Jersey Oil & Gas (JOG) leap 32% or 18.1p to 75p.

The fund manager was pleased by the commitment to green hydrogen which he said could be good for the alternative energy holdings within Henderson Opportunities, and was relieved that bookmakers Entain (ENT) and Flutter (FLTR) had avoided fresh anti-gambling measures.

Business costs rise

Richard Staveley, the smaller company stock picker at Rockwood Strategic (RKW ), was content that his worst Budget forecasts did not materialise. 

‘The increased CGT rate, which ideally should be reduced, was materially better than the ludicrous potential levels that some had been advocating and the AIM relief change a halfway house between a destructive removal and a continuation of full relief,’ Staveley said.

‘Ronald Reagan once reminded everyone that businesses don’t really pay taxes, they just have “costs”, so the increase in employers NIC [national insurance contributions] will be felt across wage negotiations and hiring intentions across the country.’

Savings disincentive

Richard Stone, chief executive of the Association of Investment Companies (AIC), said: ‘It’s disappointing to see higher capital gains tax for investors from a government which has put so much emphasis on investment and growth. Increased tax on profits from shares is a disincentive to invest in the stock market outside an ISA or pension.

‘Bringing all AIM shares and pension funds into the scope of inheritance tax will act as a disincentive to build and retain those long-term investments for the benefit of future generations.’

Stone urged investors to make full use of their annual capital gains allowance of £3,000 and tax-efficient ways to invest through pensions, ISAs and venture capital trusts (VCTs).

Questions on debt

Turning to gilts, where the government raised concerns with a £19.2bn increase in issuance to £296.9bn this financial year, Shamil Gohil, fixed income portfolio manager at Fidelity International, said: ‘While the chancellor seems to have struck the right balance between higher tax hikes, higher spending and borrowing to invest in the economy, there are question marks around the fiscal headroom, which looks quite tight, both on the net financial debt rule and current budget surplus, even after easing the rules – overspend is certainly higher than the market expected.

‘It helps that she has the backing of the Office of Budget Responsibility (OBR) on growth forecasts, however, it remains to be seen if the Labour government can credibly deliver on their plans, and execution risks remain high.’

Michael Browne, chief investment officer at Martin Currie, said that gilts investors were taking reassurance that the strain from lower expected growth and higher inflation after 2026 was being taken by not protecting spending departments which he said will be asked for 2% productivity gains and just 1.5% increase in budgets.

‘This is what the gilt market is impressed by, and why the markets are not overly concerned,’ Browne said. ‘The move to a different calculation of public sector borrowing has been clearly anticipated and allows for £100bn of capital investment over the next five years.’

He concluded: ‘Right now, the UK is affordable and offers stability. However, there is a word of warning from the OBR: “Over the forecast, business investment falls as a share of GDP as profit margins are squeezed, and the net impact of Budget policies lowers business investment”.’