Britain needs bold tax cuts to make Mrs Thatcher’s shareholder democracy dream a reality

Major investing reforms are needed to pull the economy out of third gear
Charles Hall, Head of Research

It was Margaret Thatcher who imagined a shareholder democracy, where “owning shares is as common as having a car”. She set out that vision to the Conservative Party conference in 1985 against the backdrop of the great privatisation wave of the 1980s, offering investors their first chance to buy shares in inefficient state monopolies such as British Telecom and British Gas. This was the bold era of “Tell Sid”, and countries around the world followed Britain.

But while share ownership among the public did rise during the 1980s, her dream – inspired by her economic North Star Friedrich Hayek – has never really been realised. Share ownership never quite captured the imagination in the way that home ownership did, epitomised by the sale of council housing stock, the other key Thatcherite policy. Just 12 pc of shares in UK-listed companies are in the hands of the public compared to over half in the 1960s.

Sadly, the current market dynamics hardly seem likely to revive those shareholder democracy aspirations. The irony is that London is in a de-equitisation cycle at the same time as there is an estimated £1 trillion in retail capital, ready to be put to work for companies – to invest in the wider economy, fuelling growth and jobs. But there are simply fewer companies to buy shares in: in the past five years the number of UK listed companies has fallen by 20pc, or around 100.

That number looks likely to decrease further still with just one significant float this year, and 17 companies currently under offer. Fund flows paint a picture of investors pulling away from the UK, particularly in the small and mid-cap sector. We risk a negative spiral of shrinking numbers and values, and easy pickings for foreign buyers. It matters because small companies drive growth and jobs, providing more than half of private employment. If the UK loses its allure as a listing centre, the infrastructure around it also starts to crumble, the growth sectors head elsewhere and – eventually – tax revenues suffer.

So what does the Government do to snap us out of this cycle? For starters, rediscover its inner Thatcher and create those conditions for a genuine shareholder democracy with the raft of City reforms currently in the pipeline. That’s why the recommendations of Rachel Kent’s research review are a good idea: both breaking the cycle of declining investment research enjoyed by the institutions.

We can do even more, though. Encouraging retail investors to buy shares by making retail offers in IPOs and secondary offerings mandatory needs to happen to genuinely level the playing field. Unlocking the power of the retail investor should go hand in hand with the more permissive regime and single listing segment proposals outlined in the Financial Conduct Authority’s review, removing the red tape that can deter early-stage companies from listing altogether. What if the Mansion House ambitions to funnel 5pc of funds into private businesses were to be extended to smaller listed companies, too? That vicious spiral we’re seeing could soon become a virtuous circle. 

If ministers really want to be bold and pull supply-side levers to encourage the City and widen participation, however, they really need to look at the tax system. Despite a lot of rhetoric from politicians about “seizing the opportunities of Brexit”, there has been an unseemly lack of boldness in using the tax system to help a key UK growth engine.

We need both carrots and sticks. Abolishing stamp duty on share trading, for example, would be an added incentive to share ownership. On the other hand, it has always struck me as bizarre that we allow people to invest in companies all around the world tax-free through ISAs and SIPPS. These are tax breaks offered without any incentive to invest in UK businesses and thus the policy represents a direct tax loss to the Exchequer. Surely investors should only benefit from this when they put money in UK companies through these vehicles.

Cutting capital gains tax allowances also reduces the incentive to own shares, particularly in smaller businesses where the focus is on growth. It seems perverse that profits on low-risk gilts are CGT free, yet higher risk assets incur a 20pc liability: hardly an incentive to take risks. On the other side of the coin, the Government could encourage businesses to list by giving them variable rates of corporation tax.

There is so much ministers can do to make our City healthier. If we can pull the right levers and start a trend of re-equitisation – we can pull the UK economy out of third gear and take a step towards achieving the Iron Lady’s dream.

Charles Hall Head of Research

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