Top announcements – Inflation is expected to reduce to below 2% in 2Q, which should enable interest rate cuts in the summer. National Insurance cut by 2p.
Implications for UK equity market – The introduction of a British ISA and focus on DC pension allocations should start to turn the tide of outflows from UK funds.
This is a budget that recognises the importance of encouraging UK investment for UK companies, both with the introduction of a British ISA and the requirement for DC and LPGS pension schemes to publish their UK investments allocations.
All the Budget documents can be found here
Economic headlines
- GDP forecast to grow 0.8% in 2024, rising to 1.9% in 2025, +0.5pp higher than in the autumn statement. GDP growth per capita is set to fall -0.1% 2024 and increase 1.6% in 2025.
- Inflation expectations reduce to below 2% in 2Q and 2.2% for FY24.
- Employment is to increase from 33.1m in 2023 to 33.2m in 2024, and 33.5m in 2005.
- Public sector net debt is to reduce from 98.8% of GDP in 2024/25 to 96.4% in 2025/26.
Tax reductions – the main areas announced were:
- £10bn of changes to National Insurance – the 2p reduction (from 10% to 8% for employed workers) improves take-home pay by £450 for an average worker and £350 for a self-employed worker.
- £540m from the child benefit threshold increasing from £50k to £60k. An average benefit of £1,260 for c.500k working families.
- £70m from the reduction in CGT on property sales from 28% to 24%. The change is expected to raise >£300m in time, due to an increase in transactions.
- The government intends to extend full capex deductions to leased assets.
Tax increases – the main areas announced were:
- £330m from a levy on vaping and increasing tobacco duty in 2026/27, rising to £450m by 2027/28.
- £70m from the abolition of Multiple Dwelling Relief, rising to £300m by 2026-27.
- £110m from the increase in Air Passenger Duty on long-haul flights in 2025/26.
- £185m from changing the non-domicile regime, rising to £2.7bn in 2028/29. New arrivals are to get four-year grace on foreign income, before moving to the same basis as UK citizens.
- £355m from Energy Profits Levy in 2027/28, rising to £1.2bn in 2028/29 due to a one-year extension.
Markets
- British ISA – £5k annual investment in UK equities (in addition to existing ISA allowance) following consultation (deadline 6 June). The consultation document can be accessed here.
- Introducing a requirement for DC and LPGS to publish asset allocation (including UK equity investment), with the intention to take further action if not delivering international best practice (with reference to the performance of Australian funds and their level of domestic investment). Furthermore “the government will review what further action should be taken if this data does not demonstrate that UK equity allocations are increasing”.
- NatWest share sale due in the Summer.
Consumer sector
There was nothing of direct relevance for the consumer sector, so the main impact will likely be the £450 improvement in take-home pay for workers from the 2% reduction in National insurance.
Financials
There was a broad recognition by the Chancellor about the need to stimulate (retail) investor interest in the UK. Continuing the sell-down of the government’s stake in NatWest (a further £4bn has been speculated) should drive new retail investor interest – previous sell-downs/IPO activity have tended to drive increased new clients to investment platforms like Hargreaves Lansdown, and AJ Bell. Any sell-down would remain subject to market conditions at the time, but the desire to proceed is clear.
One of the highlights of the Budget will likely be the announcement of the British ISA. As has been speculated, this is to comprise an incremental tax break of £5k to invest in UK equities (the £20k ISA allowance remains unchanged). The move is subject to a consultation, so further details will likely take time to emerge. Again, this should benefit the investment platforms, as well as some of the listed asset managers that have UK funds – Jupiter Fund Management, Liontrust Asset Management, and Premier Miton, for example – albeit the benefits will likely take time to build. As announced earlier in the week, DC pension funds are to be required to disclose their levels of investment in British businesses, as well as comparative performance against competitor schemes. This should provide further support to those asset managers that can deliver leading investment performance in UK equities, if more is to be allocated to the sector.
In summary, these measures should prove modestly positive for those stocks exposed to the UK retail investor, albeit the benefits will likely take time to emerge. Perhaps as important were the economic projections that suggested inflation will continue to fall in the coming months – generally lower inflation and the impact this should have on interest rates is likely to be a key catalyst to drive improved sentiment.
Housing, Building Materials and Merchants
The budget contained few schemes that would materially boost output in the housing industry, with nothing on planning reform or funding, and no sign of government support or intervention in the market. There were three notable changes to the tax regime though, each of which should help to increase liquidity in the market and transfer assets from those with multiple dwellings into the hands of first-time buyers.
Ending the furnished holiday let regime
Currently, holiday let owners benefit from a number of tax breaks when compared to buy-to-let owners. They are able to claim full mortgage interest relief (at the owner marginal tax rate), whereas buy-to-let interest relief has been tapered down to 20%. Additionally, holiday lets are not subject to capital gains tax, and owners are able to claim capital allowances for plant and machinery.
These tax advantages, plus the rise of Airbnb and other platforms, have made operating a holiday let much easier, and more profitable relative to buy to let. The UK currently has around 3.3m households with a second property, of which 712,000 are classed as second homes, which include holiday lets. As one might expect, holiday lets are typically located in areas with higher rates of tourism, ie larger cities like London and Manchester, and smaller coastal regions (Devon, Cornwall, etc); such areas have some of the least affordable areas in the UK, with high rents and house prices relative to incomes.
The normalisation of the tax regime should, at the margin, result in the transfer of housing stock from holiday lets to the PRS, helping to ease rental inflation and improve wider housing affordability. Bringing more stock, and liquidity, to the market should help those businesses, exposed to the lettings transaction cycle, ie property services, such as Foxtons and the associated ecosystem, eg Rightmove.
Reduction in capital gains
The rate of capital gains on property disposals (excluding primary residences) is to fall from 28% to 24%. The thinking is that this will stimulate the disposal of some PRS (or indeed now holiday let properties) that are marginally profitable on a cash flow basis, but that may trigger a large capital gain. At the margin, this should help transfer housing stock from investors to first-time buyers (who often compete with BTL investors for similar properties, given their characteristics), helping overall affordability, and improving liquidity in the market. Again, this should benefit the property services sector, such as Foxtons and LSL Property Services.
Multiple dwelling relief abolished
Multiple dwellings relief allowed those purchasing more than one property in one transaction to reduce their stamp duty bill. In essence, the cumulative sale value of the property or properties was divided by the number of properties, with SDLT applied to that figure (with a minimum band of 1% of the total value). For example, if four homes were purchased consecutively for £1m, £450k, £300k, £150k and £100k, the cumulative tax bill would be £12.5k. Utilising multiple dwelling relief, the four properties would each be charged SDLT on a £250k sales price (£1m / four properties), which attracts the 1% minimum rate, saving the buyer £2.5k.
While the scheme was designed to increase investment in the rental sector (where buyers purchase multiple dwellings), the reality is that the impact was somewhat limited. Instead of facilitating greater investment in the housing stock, multiple dwelling relief has often been used to reduce the SDLT bill of buyers purchasing larger detached homes that benefit from an annexe. For example, a purchase of a £1m property would currently attract an SDLT bill of £41.3k. Under multiple dwelling relief, the same property would attract a £25k bill (two times the £12.5k bill applied to a £500k purchase), saving the buyer £16.3k.
The suspicion that this tax break was being abused is likely due to the somewhat lax definition of habitable dwelling, which essentially constituted a bathroom and kitchen facilities, ie a toilet, shower and microwave, and a separate door to the main residence. Alongside this was the somewhat woolly wording around the allowance being available if the second dwelling is ‘under construction’. Given higher stamp duty essentially increases the deposit required for a prospective buyer (it cannot be added to the mortgage), we expect this change to lead to a marginal reduction in property transactions at higher valuations, as vendors refuse to adapt to reduced buying power from prospective purchasers.
Industrials
The chancellor preannounced an additional £360m to boost British manufacturing and R&D, focused primarily on the Life Science and manufacturing sectors. Within the industrial sector this includes:
- £73m in combined government and industry investment for ‘cutting-edge’ auto R&D projects to support the development of EV technology.
- £36m of government funding awarded through Advanced Propulsion Centre UK competitions, focused on projects to develop technologies for the next generation of battery electric vehicles.
Further measures include almost £200m of joint government and industry funding for aerospace R&D projects, supporting the development of energy efficient and zero-carbon aircraft technology. These are to be delivered through the Aerospace Technology Institute (ATI) and include:
- £40m going towards a project developing zero-carbon aircraft technology led by Marshall Group.
- £96m into Airbus-led projects in developing more efficient wing designs.
The Advanced Propulsion Centre collaborative R&D projects include companies such as Nissan and JLR, while the nine ATI projects are led by Marshall Group, Airbus, Spirit AeroSystems, Goodrich, Safran and TT Electronics – the latter is developing technology to support electrical power conversion and electric machines for future more-electric and all-electric aircraft operating at higher voltages. This is a boost for and recognition of TT’s quality and technology, but not a number-changing update.
The quoted UK Industrials sector is global, and therefore a domestic budget process normally has a limited immediate impact on our companies. We welcome any additional investment into UK manufacturing through the broader framework of the government’s Advanced Manufacturing Plan. However, we note, as an example, that Spectris, just one company, invested £108m on R&D in 2023 – not solely in the UK, reflecting its international spread – but it still places context around the scale of the government’s spending plans.
Healthcare & Life Sciences
We had fairly low expectations for the budget – assuming that the government would prioritise tax cuts (with whatever headroom was available) over spending/investment, with the chancellor having half an eye on the impending election. Whilst we did indeed get the headline-grabbing 2p NI cut (from 10% to 8%), the removal of non-domiciled status (after four years of residency), and the removal of the tax regime around second homes, in Healthcare, we noticed that Jeremy Hunt also borrowed an approach that he likely saw in the NHS: backing ‘invest to save’ schemes, prioritising proposals (for investment) that show savings to the treasury coming through within five years. Indeed, the first place he started was the NHS, with c.£5bn of new investment, fully backing the NHS Productivity Plan. This includes £3.4bn investment in NHS IT (to liberate c.£35bn in improved efficiencies). This should improve NHS apps, digitise diagnostics, implement AI, improve patient choice, and aims to ensure that all hospitals use electronic patient records (EPR), doubling the digital investment rate in the NHS. Other areas that we noted include:
- Edinburgh and Manion House reforms to continue. This was originally aimed at unlocking pension money, and the Chancellor suggested the next step was enhanced monitoring/disclosure of capital allocation (from the pension funds, as to how much they are investing locally in the UK), with the potential for more action if trends do not move in the right direction. We continue to like the directionality here, thinking more pension money should be put to work in UK, as well as specifically the Healthcare & Life Sciences sector, which is a cornerstone of the UK economy and where we are an international leader.
- The UK ISA. The announcement of a £5k ISA (on top of existing allowances) is very welcome. We continue to believe that retail investors show a much greater appetite to invest in high-growth companies than institutional money, and that not only should the UK ISA benefit the wider market and growth, it should specifically improve liquidity and investment in Healthcare and Life Sciences.
- Life sciences sector. There was a few items that the chancellor announced today that are worth mentioning briefly: an additional £45m in charity giveaways (eg cancer, dementia, epilepsy), a new investment from AZ, where £650m is to expand its Cambridge/Oxford footprint, but also with the government supporting a new vaccine manufacturing facility in Liverpool. In addition, at the start of the month, the UK government announced a £360m package to support R&D and manufacturing projects in the life sciences, automotive and aerospace sectors. Specifically, £92m is to be provided to manufacture medicines and diagnostics by a joint investment from the government and the life science industry. This included £7.5m for two pharmaceutical companies (Almac in Northern Ireland and Ortho Clinical Diagnostics in Wales), specifically to expand manufacturing facilities.
- Drug approvals. In the Autumn statement the chancellor announced greater investment in regulatory reform for the UK’s MHRA. We could not help but notice last week that this is bearing further fruit, with the first approval via the new International Recognition Procedure (IRP) in 30 days. This was launched in January 2024, and a new formulation of XGEVA (denosumab) is the first to be authorised (29 February). The process essentially passports approvals from other regulatory domains into the UK, with the government saying that it wants to take “account [of] the expertise and decision-making of trusted regulatory partners” in its authorisation process. In this instance, the product was initially reviewed by the European Medicines Agency (EMA) and received a positive opinion from the EMA’s Committee for Medicinal Products for Human Use (CHMP) on 25 January 2024.
Media
There were limited points in the budget that directly related to the Media sector, except for measures to promote a more vibrant film production industry in the UK. These measures include increasing tax credits for film production in the UK 5% and for the 80% cap on visual effects costs in the AV expenditure credits to be removed. Eligible studios are to be provided with 40% relief on their gross business rates for the next 10 years.
Oil & Gas
Three companies under our coverage are most affected by the Chancellor’s decision to extend the EPL by 12 months to March 2029: Serica Energy#, Ithaca Energy and Harbour Energy.
There is significant uncertainty attempting to quantify the potential impact five years in the future, owing to reduced visibility on future production rates, capital investment and commodity prices. However, using our currently modelled assumptions on all three businesses, below we make an estimate of the possible absolute amount and the discounted value of additional tax payable.
Our initial estimate is that Serica Energy will pay an additional c.£130m in EPL tax on profits made between April 2028 to March 2029. There should be no near-term impact on business cash flows, but when discounted back to today, the extension to the EPL could have a PHe -£87m impact on NAV. This does not include any benefit from the investment allowance (which remains in place and unchanged) on capital spend at that time, given limited visibility on capex in 2028/29. Although our models do not have detailed capex forecasts this far into the future, it is likely there will be an amount of investment in these years, meaning the real impact will likely be reduced to a level below that outlined above.
With regards to Ithaca Energy, our initial estimate is that an additional c.$177m in EPL tax on profits made between April 2028 to March 2029 could be payable. There should be no near-term impact on business cash flows, but when discounted back to today, the EPL extension could have a PHe -$137m impact on NAV.
We are currently Under Review on Harbour Energy, pending its proposed acquisition of Wintershall DEA. However, based on our last published model of Harbour Energy as a standalone business, our initial estimate is that Harbour will pay an additional c.$288m in EPL tax on profits made between April 2028 and March 2029. As with Serica and Ithaca, there should be no near-term impact on business cash flows, but when discounted back to today, the EPL extension could have a PHe -$175m impact on NAV.
With first indications of ‘leaked’ press speculate of the EPL extension on Monday, the share price of Serica Energy has fallen the most, by c.11p per share (-6%), Ithaca Energy has fallen 5p (-3.5%) and Harbour Energy has increased 5p (+2%), likely reflecting its reduced exposure to the North Sea pending the acquisition of Wintershall DEA.
Real Estate
From 1 June 2024, Multiple Dwellings Relief (MDR) is to be abolished. The removal of this bulk purchase relief for residential properties comes on the back of an external evaluation that showed “no strong evidence” that it is meeting its original objectives of supporting “investment in the private rented sector”.
HM Treasury’s own calculations of the policy change point to a £70m tax revenue benefit in the 2024-25 tax year, and a further £1,245m of additional revenue in the following four tax years.
Although we await further details, we believe the abolition of this relief could affect valuations for residential assets within our coverage, particularly for Grainger, Unite, and Empiric Student Property#.
Valuers would likely have to reflect the additional purchasers’ costs in their biannual valuations, and all else equal this would reduce the book value of the assets. In an extreme example, an asset where MDR led to no tax bill (ie the individual units were valued at less than £250,000) could, upon abolition, attract the non-residential rate of 5%.
Retail
There was a lack of retail specific measures in the Budget, despite some discussion around the merits of bringing back VAT refunds for non-EU tourists, the so-called ‘tourist tax’. The other key topic remains the need to reform Business Rates, which is consistently being kicked down the road.
For the consumer, household disposable income should benefit from changes in the Child Allowance thresholds, and also from the new cut to National Insurance, which takes effect from April. Taken in conjunction with the April increases to the NLW, State Pension, Benefits and wider pay increases, and the 12% cut to the energy price cap from 1 April, households are set to benefit from a notable increase in absolute and real spending power. Last year, a number of retailers commented that the absolute spending increase was noticeable in trading improvements following the spring uplift in wage and pension rates, as households effectively started to spend their pay increases across the economy.
Support Services
Overall, there was little news flow of direct relevance for the Support Services sector, but some helpful commentary (supporting sentiment for the contractors and the rental companies, in particular). The consultation over a new accelerated planning service for major commercial applications should help drive contractor resource efficiency (potentially benefiting customers and contractor margins). Delivery milestones into 1,000 electricity connections as well as wider initiatives to accelerate grid connections is supportive for Balfour Beatty in particular. Rail transport commentary and initiatives (including East/West Rail and Northern Powerhouse Rail) is positive for Renew Holdings# and Kier#, Galliford Try#, Kier# and Renew# should also benefit from the commitment to spend £8.3bn (11 years) for potholes/bridge repair/local roads upgrades. The commitment to explore a further large-scale nuclear reactor (alongside Hinkey Point and Sizewell) is helpful for sentiment for the Tier 1 contractors. At first read, the rental companies Speedy Hire# and may benefit from the full expensing of assets for leasing. However, this is subject to fiscal conditions and draft legislation. We await developments.
Technology
There was limited relief for technology companies, technology investing, or for supporting the private sector’s adoption of more technology. An advisory panel on R&D Tax Credits covering tech and life science sectors and a taskforce looking into supporting SME Digital Adoption represent the extent of this government’s initiatives. Support for university spin-outs is also limited to a Spin-outs Review, with consultation around a £20m proof-of-concept fund being initiated.
In the public sector, there was better news: the NHS is set to receive £3.4bn in funding aimed at improving productivity. Of this, £430m is to be allocated for managing and delivering technology-powered virtual appointments; £1bn to help with technology that reduces the administrative burden on NHS staff; and £2bn to be invested in updating fragmented and outdated IT systems across the NHS.
Outside the NHS, £800m is to be spent on modernizing technologies across the police, the justice system, and even piloting the use of AI solutions to support the streamlining of planning authorities.
Taking a step back, the biggest likely beneficiaries of these policy changes are IT Services players like Kainos and Made Tech, VARs exposed to the public sector like Bytes and Softcat, alongside technology vendors like Idox# that assist the public sector in digitizing more effectively.
Overall, we are disappointed by this budget, particularly outside of its support for the digitalization of the government. For example, there is not much for very strategic sectors like Semiconductors, nor for Software R&D that underpins disruptive technologies like AI.
Transport
The budget increases APD (Air Passenger Duty) for economy seats by forecast RPI in TY25-26, and for premium economy, business and first class by forecast RPI, but further updated to increase for recent high inflation.
We see this as extremely misguided and poorly considered, as the UK already has the highest level of aviation taxes globally, and hinders the recovery from Covid, during which UK airlines were poorly treated by the government and heavily impacted by the collapse in passenger volumes. All airlines in our coverage are impacted, as higher taxes result in higher pricing and a negative effect on demand. International Consolidated Airlines Group is the most impacted, as BA has recovered capacity by the least, and has a large premium class offering, followed by Jet2 as it is almost entirely UK-originating traffic, with easyJet at c.50% and Ryanair and Wizz Air at c.15%.
The UK already has the highest level of aviation taxes in the world. To put this into perspective, in 2019, the most recent year for which BA operated a full level of capacity, IAG paid c.£850m of APD, almost entirely from BA, representing 44% of BA’s EBIT of c.£1.9bn. Since 2019, APD rates have increased materially, and BA’s EBIT is c.25% lower. Payroll-related taxes represented a further 25%. Environmental taxes have risen further, and the government is mandating that SAF use starts in 2025 and represents 10% of fuel consumption by 2030, whilst doing nothing to help domestic production and leaving UK-based airlines unable to source supply.
Business and corporate travel has failed to recover from the pandemic. There are a number of reasons for this, but the rise in APD is one of them, and this further increase will likely obstruct recovery further.
BA’s capacity has recovered by less than the other group airlines, and in 2023 was only 90% of 2019 levels, compared to Aer Lingus 104%, Iberia 103% and Vueling 109%. Higher rates of UK taxation are part of the reason for this.
Air travel is a key driver of economic growth and exports in particular. Increasing APD beyond the current already in our view excessive levels only makes it more difficult for UK businesses to compete globally and hands an open goal to international competitors. Flying to the UK will also become even more expensive than travel to other countries, making the UK a less attractive location for international companies to base operations. This is on top of an oppressive tax regime and lack of housing supply.
For IAG, we will now assume a slightly slower recovery, particularly in business travel due to the impact on BA. Ironically, BA is just introducing a new business class seat. It is a true ‘best-of-British’ bringing together suppliers from England, Scotland and Northern Ireland. Having sat on it recently, we can definitively state that it is incredibly comfortable, but this further increase in APD will only feel like another kick in the backside for passengers, BA and IAG shareholders.
Travel & Leisure
There is very little that was not expected in this Budget. From 6 April 2024, the 2p National Insurance cut is worth £450 pa to the average worker. This is good for the consumer. In the long term, it is good for the Treasury, as the OBR expects it to encourage 200,000 people to return to work, and it is good for the Leisure sector, which has suffered years of labour shortages.
Alcohol duty and fuel duty are frozen for another 12 months. Combined, these take 0.2pp off inflation relative to increasing these duties. Rather than being pleased, the sector would prefer the sword of Damocles to be lifted entirely, rather than left hanging in place.
In the Autumn Statement, the Chancellor announced the permanent ‘full expensing’ on capex, a £10bn tax cut for businesses. “Today I take further steps to boost investment,” announcing an intention to publish draft legislation for full expensing to apply to leased assets. We need more detail to know what this means for expansive leasehold operators like Loungers#, The Gym Group# and Hollywood Bowl.
#corporate client of peel hunt
