Abolishing the share tax – a crucial move for the UK economy

The UK equities market is struggling with a lack of funding and losing IPOs to the US. In this article, Brendan Callan, CEO of Tradu, argues that the share tax must be eradicated in order to stimulate retail investment and fix the UK’s flailing capital markets

In the recent Spring Statement, the UK government made clear that economic growth is at the top of its agenda. However, boosting the economy will require fresh investment into the equities market, including from retail investors, and Rachel Reeves’ lack of mention of the share tax sets a worrying tone.

UK retail investment is suffering. According to the ONS, retail investor participation fell to 10.8% in 2022 from 54% in 1963. Similarly, the proportion of households directly owning stocks has been cut in half since 2003.

Currently, there are several barriers dissuading the public from investing in UK equity markets, even though investing offers fewer financial barriers than property ownership and can bolster long-term financial security. First and foremost, among these is the stamp duty levied on UK stocks and shares, which acts to hike up the price of engaging with the equities market for UK households.

Eliminating this tax would bring in many advantages, such as reducing friction in UK equity markets, making stocks more attractive and stimulating retail investor participation. This move has the potential to rejuvenate the economy and capture a much-needed capital injection for the UK market.

Competition from across the Atlantic

The declining interest in UK equities, fuelled by a combination of sluggish economic growth and dampened investor confidence is making UK markets appear less attractive compared to their international counterparts. The Investment Association reported that £25bn has been taken out of the UK stock market in the last two years alone.

On the other side of the pond, US stocks, although taking a big hit in the recent market crash, have drastically outperformed UK equities in recent years. Competition is heating up and investors are increasingly shifting their focus to such high-growth opportunities.

If the UK does not act now, it risks falling further behind global markets, losing out on critical investment, and stifling its economic potential for years to come.

Turning the tide and ensuring upward trajectory

Despite all the doom and gloom, the UK has a unique opportunity to shift the narrative around its underperforming equity markets. In investing, downturns often present the greatest opportunities, and the UK market has been in a prolonged dip that value investors may now find hard to ignore.

Currently, the UK market trades at a notable discount compared to its international peers, particularly the US, making it an attractive prospect for those seeking undervalued assets.

Sectors such as housing and consumer discretionary are well-positioned to benefit from recent economic changes, offering the potential for strong returns as conditions improve.

Efforts to streamline regulations, make listings easier, and create a more business-friendly environment signal positive momentum. These initiatives aim to foster growth and competitiveness, paving the way for renewed interest in UK equities.

Early signs of a turnaround are emerging – November marked the first month of inflows into UK equity funds in over three and a half years, indicating that confidence in the market may slowly be returning.

However, there is still a critical barrier that needs to be addressed: stamp duty on share trading. This tax is effectively a cost on trading and investing, making UK markets less competitive.

Retail investors are naturally drawn to markets with lower costs, such as the US, which has no equivalent tax, encouraging them to invest in overseas businesses rather than supporting domestic companies.

Eliminating stamp duty would not only reduce friction for investors but also enhance the attractiveness of UK equities, further contributing to the transformation of the UK’s economic slowdown into positive momentum.

Seizing economic opportunity

Increasing retail investor participation would free up new capital for businesses, providing a boost for the UK economy. If we want to foster a stronger equity culture, we must transform savers into investors and encourage long-term wealth creation.

The investment behaviours of countries like Sweden and Australia, where a quarter of financial assets are allocated to equities and funds, serve as clear examples of how changes in equity culture can bolster domestic support for businesses. If the UK were to match these levels of retail investment, we could unlock £740bn in capital to support our capital markets.

This surge in investment would spark innovation, stimulate economic growth, and create jobs.

The share tax must be abolished if we want to boost personal wealth and enable the country to embrace its full economic potential.