Rachel Reeves’s anticipated inheritance tax (IHT) changes have sparked a sharp sell-off in UK stocks, with investors withdrawing nearly £300m from funds invested in small UK companies last month, according to Morningstar Direct.
This represents a significant increase from the £80m withdrawn in August and reflects growing apprehension among investors about potential tax changes in Wednesday’s Budget.
Funds specialising in mid-sized UK stocks also experienced net outflows, with £30m withdrawn in September, ending five months of consistent inflows. This shift underscores the uncertainty in the market, as investors seek to avoid any adverse effects on their assets from possible changes to IHT exemptions.
Shares in smaller companies listed on Aim, the junior stock market, have long been a popular choice for wealthier investors aiming to minimise inheritance tax, as these shares currently qualify for business relief, making them exempt from IHT. However, fears of changes to this tax break are causing investors to divest before Reeves’s maiden Budget announcement.
Neil Birrell, chief investment officer at Premier Miton, highlighted the increased activity among smaller private investors concerned about IHT. “There’s very little liquidity around, and that’s pushing share prices down. Beyond that, there’s a general hesitation to invest in the UK ahead of the Budget,” he noted. The uncertainty, he added, has cast a shadow over UK equity markets, dampening sentiment.
Market analyst Mark Preskett from Morningstar also observed that financial advisers are seeing heightened nervousness among clients over the potential tax changes. “Some clients are anxious about potential tax adjustments, leading to more redemptions in recent months,” he explained. Smaller and mid-cap stocks, which are more exposed to the UK economy, are especially vulnerable to any Budget outcomes impacting domestic markets.
The impact of these investor moves is being felt by fund managers, with Liontrust reporting over £1bn in net outflows over the last quarter and wealth manager Brooks Macdonald attributing £100m in outflows to a drop in investor confidence.
As the Budget draws near, UK equity markets are under pressure, with investors looking to mitigate risks amidst speculation on tax reforms. This trend reflects broader concerns about the economic outlook and the potential for policy shifts that could reshape the investment landscape for small and mid-cap stocks in the UK.
