Beyond Balancing the Books
What are the investment implications of Labour’s Autumn Budget?
Drawing on information taken from the Commons Library Research Briefing: Autumn Budget 2024 Summary, the OBR’s October 2024 Economic and Fiscal Outlook, and the Financial Times, this analysis unpacks the potential implications of Labour’s fiscal adjustments on investment strategies.?
The 2024 Autumn Budget, Labour’s first fiscal outline in over 14 years, reflects a shift in the UK’s economic priorities. It introduces adjustments to employer National Insurance rates, revisions to capital gains tax thresholds, and significant infrastructure investments. These initiatives are positioned to address socioeconomic needs and support public service renewal, aligning with Labour’s vision for sustainable growth and equitable resource distribution.
For investors, understanding the implications of these fiscal changes is crucial. Key areas likely to see an impact include real estate, private equity, infrastructure, and ESG-focused assets, with potential shifts in value as policies take effect. Specifically, changes to employer taxation may influence corporate strategies, particularly in capital-intensive sectors, while capital gains tax adjustments could reshape investment planning.
We consider the UK’s upcoming fiscal adjustments and the potential impact on investment strategies.
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Key Fiscal and Policy Shifts Impacting Business and Investment
Employer NICs will see a rate hike from 13.8% to 15% effective April 2025. Additionally, the NIC threshold will be reduced from ￡9,100 to ￡5,000, which the Treasury projects to generate approximately ￡25 billion in annual revenue. While the government has increased the employment allowance to help smaller firms offset the rise, larger firms and labour-intensive industries are likely to experience elevated operational costs.
This policy change may encourage businesses to reevaluate workforce structures and explore greater automation to offset increased payroll burdens. For investment in labour-intensive sectors, such as manufacturing, retail, and hospitality, the higher NICs could marginally affect profitability ratios. Companies that qualify for the expanded employment allowance may find opportunities to optimise their workforce models, especially in low-margin industries.
For private equity investors, these developments underscore the importance of due diligence on payroll structures and overhead costs in target companies. Cost-benefit assessments around workforce automation and outsourcing may also become more common in strategic decision-making.
The budget’s adjustments to capital gains and inheritance taxes could have some implications for asset sales, estate planning, and corporate structuring, especially for high-net-worth individuals and family businesses. Effective immediately, CGT rates rise from 10% to 18% (lower) and from 20% to 24% (higher). The Business Asset Disposal Relief (BADR) and Investors’ Relief (IR) rates will similarly increase, gradually rising through 2025 and 2026.
On inheritance tax, as of April 2027, adjustments will apply to pension wealth that is transferable at death, expected to raise ￡1.5 billion annually. Meanwhile, business property relief (BPR) will be restructured, offering 100% relief on assets valued under ￡1 million but reducing relief to 50% on higher values. These adjustments could lead to a notable shift in estate planning strategies, especially for investors with significant agricultural or business holdings.
Family offices and trust structures may need to implement alternative tax mitigation strategies, such as offshore holdings, which align with new tax thresholds. The new policies on stamp duty and CGT seem to favour institutional ownership of real estate assets over direct owners. Therefore, we might see a move towards larger institutional ownership of UK real estate as is the case in the US for example. For private equity investors and real estate portfolios, this alignment would intensify tax burdens and may prompt accelerated exit strategies or restructured holdings to mitigate higher outflows. Here again, real estate investment trusts (REITs) offer distinct advantages over direct ownership of real estate.
Labour’s commitment to enforcing tighter regulations around non-domiciled individuals includes plans to subject offshore assets held in trusts to inheritance tax, a move expected to generate significant additional revenue. This measure specifically targets the practice of using offshore structures to shield wealth from UK taxation. Additionally, Labour’s policy aims to reduce tax exemptions that have historically allowed wealthy non-doms to avoid taxation on overseas income. By implementing these adjustments, Labour anticipates curtailing some tax advantages that have previously attracted high-net-worth individuals to the UK. As these benefits are reduced, investment inflows, particularly in prime property and luxury asset markets, may see slower growth, potentially impacting high-value, cross-border investment strategies.
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Public Sector Spending and Infrastructure Investment Open New Avenues
The budget allocates one-third of its spending increase to infrastructure, covering sectors such as transport, housing, and research and development. Specifically, the National Wealth Fund will channel funds into projects supporting green energy, housing, and road maintenance, contributing to long-term GDP growth over the next 50 years. Additionally, the Department for Transport will receive investment increases aimed at advancing local road maintenance and public transport initiatives.
For real estate investors, heightened government spending on affordable housing could signal increased demand for increased demand for private investment in the affordable housing sector housing sector. With an additional ￡500 million earmarked for the Affordable Homes Programme and a CPI+1% indexing of rents, there is potential for increased private investment in affordable housing projects or for private equity funds targeting community housing developments. Aligning with these affordable housing initiatives can further support ESG-focused strategies, potentially tapping into social impact investment to bolster both return on investment and societal benefits. By taking part in affordable housing development, investors could enhance community impact while addressing a growing demand for low-cost housing solutions. From an ESG standpoint, green energy and carbon-neutral projects backed by National Wealth Fund investment align with market demand for sustainable investment vehicles.
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The Office for Budget Responsibility (OBR) Economic Forecasts
The OBR forecasts GDP growth to accelerate to 2.0% in 2025, before stabilising at approximately 1.5% through 2029. This growth trajectory, while moderate, indicates stability, though inflationary pressures are expected to linger above the 2% target until 2029, with a peak effect in 2026 at 2.7%.
Inflation persistence could place upward pressure on input costs, particularly in manufacturing, construction, and services. For investors, inflation-linked assets, such as infrastructure and utilities, may offer a measure of resilience against sustained inflation. For Rasmala, the strategy has been to invest in assets that can quickly adjust income for inflation, for example residential built-to-rent schemes or inflation-linked commercial leases tend to better protect portfolios against erosion of value. Increased employer NICs may exert secondary inflationary pressures as businesses adjust pricing structures to accommodate rising overheads, potentially leading to reduced profit margins in price-sensitive sectors.
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Real Estate, Private Equity, and Private School VAT Adjustments
The stamp duty land tax (SDLT) for second homes has increased from 3% to 5%, which could temper the rate of new acquisitions in high-demand property markets, such as London. However, on the one hand it may create space for first-time buyers, but on the other hand it may also reduce the supply of rental accommodation and result in higher rents. Real estate investors may wish to assess short-term acquisition rates against potential longer-term rental returns, especially in regions with rental demand surges.
Labour may also consider incentive structures to encourage landlords to expand rental availability, counterbalancing stricter eviction policies and other tenant protections. Such incentives could involve tax reliefs or grants for landlords, stabilizing supply in the private rental market amid rising regulatory costs. Investors in the private rental market may wish to assess these incentives as part of a broader rental yield strategy.
For commercial real estate and private equity investors, business rate relief, capped at 40% for retail, hospitality, and leisure sectors in 2025, can offer strategic avenues for optimising operational expenses. Additionally, lower-rate business rates for retail and hospitality spaces starting in 2026 could encourage strategic repositioning within these sectors, possibly boosting valuations over time. Commercial investors might consider repositioning retail assets to take advantage of these shifts, maximizing value through rate relief.
Introducing a 20% VAT on private school fees marks a notable shift in the education sector, potentially affecting demand dynamics and, indirectly, the real estate market in areas with a high concentration of private schools. For real estate investments in proximity to such institutions, analysing shifts in property demand and exploring diverse tenant pools may become more relevant as demand for private schooling potentially adjusts.
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Strategic Implications for Investor Portfolios
In the immediate aftermath of the speech, more attention has been focused on the revenue (i.e. tax) side of the budget speech, and not enough on the spending side. The budget carries with it a historic expansion of the NHS, and additional investment in social housing, education, infrastructure and green energy sectors. This is bound to open many avenues for private investment in social infrastructure sectors such as senior living, social housing, renewables, etc. There could be a case for renewed interest in long-income strategies in these areas.
The increase in SDLT and CGT rates and the end of non-dom status will reduce the attractiveness of owning ‘second homes’. In the short-term, this will weigh somewhat on prices, particularly in London but in the longer term, it will reduce the availability of housing stock available for rent. Long-term investors may therefore capture the buying opportunity thus afforded.
Capitalizing on restructuring needs in response to increased NICs and CGT rates, private equity portfolios could explore acquisition targets where automation or offshoring can offset rising tax burdens. Companies in need of restructuring or looking to diversify revenue streams may align well with strategies focused on resilient sectors, such as technology, healthcare, and sustainable industries. At the same time, an increase in carried interest rates to 32% may deter some UK-based PE managers or make them relocate to other jurisdictions.
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Conclusion
The 2024 UK Autumn Budget provides a framework that emphasizes both immediate economic stability and long-term growth potential through strategic public investment. Aligning portfolios to capitalise on inflation-linked, ESG-compliant, and government-supported assets while adjusting for tax impacts in labour-intensive sectors positions the firm for resilient, sustainable growth. This approach not only mitigates immediate fiscal pressures but aligns with future-oriented investment trends in a dynamic economic environment.
For more thoughts on The Labour Party's Autumn 2024 Budget and its impact on GCC investors, get in touch with our Chief Investment Officer, Ali Taqi, CFA. Or reach out to Adnan Adil and Ruggiero Lomonaco for more subject matter expertise.
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Fantastic read!