Can the Chancellor make Britain grow again?

Slowing flows into UK markets have long been a source of frustration for successive governments. The health and vitality of UK markets is a key economic cog and there are positive signs the Labour government is now looking to help.

Government incentives – mechanisms such as the Seed Enterprise Investment Scheme, Enterprise Investment Scheme and Venture Capital Trusts – have done a good job of helping start-ups in the UK. However, for companies scaling up I believe there’s less support – particularly if they’re large enough to list on the London Stock Exchange (LSE).

This matters as there can be management inertia around where a company is listed. The business is more likely to be headquartered in the UK, pay UK corporation tax, employ people here etc. In addition, the supporting infrastructure could be UK-led – providing work for UK law firms, brokers and lending from financial institutions. The owners and founders of the business may also live here in the UK, meaning any realised capital might is reinvested into the UK - all of which drives growth.

Less capital flows often results in lower UK share valuations. This can lead to these businesses (with their intellectual property) being taken over cheaply, often by international firms. We have seen this trend play out in recent years as British investors’ have shown a willingness to accept these offers for a short-term gain. It’s the main reason that we never see giant, asset-light companies in the UK. Unfortunately, the UK doesn’t have a string of tech billionaires that are willing to let a loss-making company grow for a long time before seeking an exit – unlike Silicon Valley. 

The good news is that there are some signs of life in the UK market. The broader backdrop for initial public offerings (IPOs) appears to be improving as brokers receive more enquiries from companies potentially looking to list in the UK. However, this still isn’t keeping up with the number of companies looking to move their listing to the US – where they believe they could be trading on higher valuations – or companies delisting as they’re taken over. 

What could be done to revive UK capital markets?

Cash ISAs - The government has considered some reforms to Cash ISAs to encourage savers to invest in the stock market. In July, the Chancellor shelved these plans as she came under pressure from banks and building societies stressing the importance of those savings for things like mortgage lending. It’s likely the Chancellor may revisit this.

Read more: Is Rachel Reeves set to cut the Cash ISA allowance?

Stocks & Shares ISAs – According to the latest figures from HMRC, in the tax year 2022-23, £28 billion was invested in Stocks & Shares ISAs. Very little of this is being invested in UK equities. If this trend continues, any cash ISA reforms may be redundant.

To counter this, the government may look to introduce a minimum UK equity holding in Stocks & Shares ISAs. Another alternative is to reconsider a ‘British ISA’, which was previously proposed by the Conservative government. Not only could the changes result in significant flows for UK markets, but they could raise more in tax revenues through increased stamp duty receipts. 

Pension reform – New Financial, a London-based think tank, has said defined contribution pension schemes allocate just 4.9% of total assets to UK equities, on average. The global average for domestic equities is 13%. Rachel Reeves recently addressed this in her Mansion House speech, but she also needs to ensure that any reform will benefit the UK’s small- and medium-sized businesses which are the country’s main driver of growth.

Reform business relief – In the Budget last October, Rachel Reeves targeted business relief (BR) which allows investors and entrepreneurs to pass qualifying assets to loved ones on death inheritance tax-free. From April 2026, any BR qualifying asset above £1million will be subject to 40% inheritance tax (IHT).  In addition, BR on AIM shares was reduced to 50%, regardless of whether an individual holds other BR assets. The government needs to raise tax receipts from somewhere so it is unlikely they will reverse this. My personal view is the economic damage from these actions may outweigh the amount raised in tax receipts.

If the government intends to keep its new BR reforms, then it could also look at some of the alternative BR products. As an example, forestry currently receives 100% IHT relief. There are also billions in similar tax-efficient products that, in my view, have a limited benefit to the UK economy which could be targeted to raise tax revenues.

The above list isn’t exhaustive – there are plenty of levers for Labour to pull to help the economy. The UK is one of the most entrepreneurial markets in the world – the government has the chance to embrace this and pave the way for future growth.