4th March 2021
The 2021-22 UK Budget has been announced by Chancellor Rishi Sunak.
Last year saw the UK Government’s biggest borrowing spree since the Second World War, with at least £12bn of spending dedicated to tackling the coronavirus outbreak. A year on, and coronavirus related government spending is estimated at over £280bn and rising, as overall debt reaches over £2.1 trillion. Despite this rise in debt levels, the OBR says it expects that the UK economy will reach pre-covid levels of growth by the middle of 2022, six months earlier than previously forecasted.
For the investment management industry, the second half of 2020 saw increased amounts of fundraising, and intense capital deployment across all asset classes. Credit funds in particular have made a resurgence, alongside several strategies looking to take advantage of the current market dislocation, such as distressed hotel, or retail repositioning strategies. Infrastructure investments have also gained in popularity, against a backdrop of low interest rates and reduced government bond yields, and we expect this trend to continue with the recent announcement of the UK Infrastructure Bank.
We are finally feeling the full force of Brexit, both in practical and regulatory terms, as UK managers seek to regain market access to Europe amid uncertainty over the application of MiFID to the marketing of fund interests.
The Chancellor is faced with a delicate balancing act between prioritising medium term goals to stimulate economic growth once lockdown ends vs the long term goal of restoring public finances.
We have summarised some of the key points from the Spring Budget 2021, and will be assessing the impact of this over the coming weeks.
Mortgage Guarantee Scheme and the extension of the Stamp Duty holiday
Mr Sunak announced the launch of a “Mortgage Guarantee Scheme”, allowing banks to lend to property buyers with just a 5% deposit on properties valued up to £600,000, with the loan underwritten by the Treasury. This is coupled with an extension of the Stamp Duty holiday until the end of July, with the nil rate band (£0-125,000) being doubled until the end of September. Historically, schemes such as “Help to Buy” have pushed up property prices across the UK as a greater pool of buyers gain access to the market, and the Mortgage Guarantee Scheme may have a similar impact. Residential property has already proven a popular asset class of late amongst real estate investors, and further growth in UK property prices will likely perpetuate this.
The Chancellor also stated that for UK businesses with profits greater than £50,000, corporation tax will increase from 19% to 25% by April 2023. Although the UK will still have one of the lowest tax rates in the G7, this will be seen by many as a significant increase, and a U-turn on previous Conservative government promises to reduce corporation tax. In light of the recent Brexit transition, some speculated that lower tax rates could allow London to become “Singapore-on-Thames” but this announcement puts pay to that idea. For startup businesses which often operate on already thin margins, this will likely have a significant impact, and some may be concerned of the effect this will have on UK entrepreneurs.
While some businesses have struggled throughout the pandemic, others have built up significant cash reserves. In light of this, the Chancellor announced a “Super Deduction” tax rate to unlock this cash and encourage an investment-led recovery. Under these plans, businesses that reinvest cash can reduce their tax bill not just by a proportion of the spend, or even by the whole amount, but by 130% of the cost. This change is forecasted to boost business investment by 10%, and will run for two years. For cash rich businesses, this provides added incentives to invest in growth plans and could be of interest to private equity investors.
UK Infrastructure Bank
Beginning this spring with £12bn, rising to approximately £40bn, the newly announced Infrastructure Bank will provide support to both private and public infrastructure projects. The Chancellor emphasised that this will be mandated to invest in green infrastructure, to assist the UK in its transition to “Net Zero”. These plans were initially announced last year, and we expect to see greater focus on the UK’s green investment plans in the run up to COP 26 in November. We expect to see investors in renewable assets be benefactors of this announcement, with greater capital now being invested in the sector.
UK Financial Services
Mr Sunak welcomed Lord Hill’s review of the UK’s financial services industry, and committed the Treasury to bringing forward a consultation on the issues raised by the review. Notable points of the review include changes to the free float requirement for listed UK companies, from 25% to 15%, as well as reducing regulation on SPACs (“Special Purpose Acquisition Companies”) which raised over $64bn on Wall Street last year. This will be of particular interest to private equity managers viewing IPOs as a route to exit, as well as managers of REITs who have traditionally used The International Stock Exchange to reduce or eliminate the free float requirement.
Other notable points made by the Chancellor included;
What didn’t we see?
Before the budget announcement, there was much discussion of changes to Capital Gains Tax. For many managers, this would have a significant impact on carried interest, as well as for business founders who are already suffering higher tax rates after the reduction of entrepreneurs’ relief in the 2020 Budget.
Business rates for the retail, hospitality and leisure sectors have been reduced to 0% since April 2020, and this has now been extended until June, tapering for the rest of the year. However, this stops short of a permanent cut which many in the retail sector were hoping for, particularly investors in high street retail assets. In the absence of any “Amazon tax”, it seems the high street struggles will continue throughout 2021.
View the full 2021 Budget here.