Changes to capital gains tax rumoured to be one of the key planks of the Budget on 30 October are likely to have major implications for investors and potentially even send them towards capital lossmakers, says Stifel.
“Any increase in CGT rates and reduction in ISA allowances would be unhelpful both for the investment companies sector and are likely to discourage savings and investments more generally,” says the US broker.
That is likely to manifest itself in wider discounts and some tax-related selling of investment companies and other equities over the next few weeks ahead of the Budget.
“We think any material selling may result in a widening of discounts on listed investment companies, as the market struggles to absorb any increased supply of shares from investors.”
If CGT goes up significantly, this will have implications for longer-term stock market liquidity with investors put off shares once the change takes place to avoid a liability.
“They may hope that another Government may lower CGT rates in the future, or indeed hold onto assets until they die and are taxed under the Inheritance Tax regime.”
Indeed, Stifel believes investors look at investments that will lose money over time and generate capital losses that can be used to offset gains.
“We suspect that some of the infrastructure funds, especially those with a high weighting in concession projects such as PFI in the UK and PPP overseas are likely to see declining NAVs and hence share prices over the long term, as these concessions come to an end and we assume have no future value.”
These funds will pay out sizeable dividends in the meantime.
Funds with significant PFI/PPP exposure include BBI Global, HICL Infrastructure and International Public Partnerships.