Why we need more than a UK Isa to shift control of smaller UK businesses

There are opportunities and British business is doing its best to keep the British growth engine running. But supportive measures to boost share ownership and IPOs could add much-needed oil to the machine.

The growing recognition that action needs to be taken to stimulate UK economic growth and revive IPOs is striking. Peel Hunt’s excellent recent report on the headwinds for the FTSE SmallCap index is a case in point.

Despite obvious challenges, the long-term opportunities for smaller UK businesses remain and if we look beneath the surface there are some strong stories to be told.

Some of our main interests such as: 4print And Jet2have shown good growth for the markets in recent turbulent years, with Jet2 doing particularly well in difficult consumer times. Ashtead Technology, Vovolution, Hollywood bowl are other success stories.

The key is to look for robust earnings growth and earnings resilience. Therefore, I feel that the “recession” that has been talked about for the past twenty-four months has been somewhat of a non-event, and more recent data has challenged the narrative.

Interestingly, a key highlight for me would be that while UK GDP growth tends to compare unfavorably against other regions, there are plenty of high-quality UK companies still reporting strong results.

And looking more broadly at UK funds, it’s notable that when you look at funds’ earnings growth, plus dividend income, total returns can take on a much more interesting shape.

Recession or not, if you have no investments in the UK sector and were to get in now, there are tempting valuations for long-term stock pickers, but they are not enough on their own.

Jet2 is an example of a small UK-listed company ‘performing particularly well in difficult consumer times’

Policy reforms have at least signaled positive intentions, with the proposed UK Isa being a clear example, but I wonder whether the extra £5,000 allowance would actually be enough to move the switch.

Where we really need to see more action is at the regulatory level, to make Britain more competitive. Stamp duty on UK shares is an example of this. We believe that the abolition of stamp duty on UK shares and UK-based investment trusts could be the biggest boost to UK share ownership in decades.

Private investors seem to agree. Interactive Investor research last month among 2,000 website visitors found that 82 percent of respondents thought ‘de-stamp’ UK shares would encourage more investment in UK listed companies.

The impact of a reduction or abolition of stamp duty on transaction volumes could be significant. And if stamp duty is included, investment projects whose expected returns are lower than the cost of capital in the presence of stamp duty would not proceed.

The investment would not happen even if it would have been worthwhile without the distortive tax.

Stamp duty also has a distorting effect in other ways. Take UK-based closed-end funds, also known as investment trusts. Private investors pay ‘double’ stamp duty tax, once when they buy the investment trust’s shares, and again when the fund manager places a UK purchase into the fund. As a manager who has the privilege of managing both closed-end and open-ended funds, I find this as baffling as it is unfair to mutual fund investors.

More generally, smaller UK companies should be a valuable part of a well-constructed portfolio – the opportunities are there. While patience, as always, is crucial, if we really want to change course we also need support to keep Britain competitive.

The British business community is doing its best to keep the UK growth engine running, but measures to support share ownership and initial public offerings could add some much-needed oil to the machine.

Abby Glennie is deputy head of smaller businesses at Abrdn.