Investors dumped £1bn from UK funds to avoid budget tax rise

Investors ditched nearly £1 billion from funds focused on UK stocks last month as they tried to book profits before Rachel Reeves increased capital gains tax in the budget.
Researchers at Calastone, the largest global funds network, found that stock sell orders rose by 36 per cent in the month to October 29 to a record £17 billion, suggesting that investors tried to crystallise profits to avoid paying more tax on them.
At the budget last month the chancellor announced that the higher rate of capital gains tax paid on shares would increase to 24 per cent from 20 per cent while the lower rate would increase to 18 per cent from 10 per cent.
The move was part of a collective £40 billion increase in taxes by Reeves, putting the tax burden on course for its highest level on record. After these tax increases were announced on October 30, Calastone said that sell orders fell by 40 per cent compared with the previous day. Calastone monitors 85 per cent of activity in the funds market.
Edward Glyn, head of global markets at Calastone, said: “Fears of a capital gains tax grab in last week’s budget spurred investors to book their profits and crystallise a lower tax bill well before the chancellor rose to her feet in the Commons.
“The startling change in behaviour between October 29 and budget day is a clear indication that tax was the main motivation for all this activity.”
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Net outflows from equity funds jumped to £2.71 billion in October, the highest figure on record for that month and following the first outflow in nearly a year in September. Of this net outflow, £988 million came from UK-specific equity funds, while a further £733 million came from equity income funds that have a high exposure to the UK stock market. UK equity funds have suffered from net outflows since May 2021.
Investors channelled £631 million into fixed income funds last month, the biggest rise since June 2023, reflecting the steady increase in bond yields over the past month. Traders have curbed their bets on the US Federal Reserve lowering interest rates rapidly over the coming year after economic data signalled robust economic growth and stubborn inflationary pressures.
UK government bond yields have also risen sharply since the budget, caused by investors pricing in more government borrowing and tighter monetary policy to offset the inflationary impacts of loose fiscal policy.
The Federal Reserve is expected to lower the federal funds rate by a quarter of a percentage point on Thursday, as is the Bank of England on the same day.