Chancellor George Osborne announced as part of his Autumn Statement last week that stamp duty would be abolished for investors purchasing ETFs.
However, the consensus from experts was that as no ETFs are domiciled in the UK – but instead largely based in Ireland or Luxembourg – investors have not paid stamp duty on their holdings anyway.
A Treasury spokesperson told Investment Adviser the decision to abolish stamp duty on ETFs was to “remove a barrier that stops them domiciling in the UK”, but admitted it would “not change things immediately”.
Initial reaction ranged from SCM Private co-founder Alan Miller, who uses only passives in his fund, calling the move “less than a non-event”, to those who welcomed the government’s attention on the sector.
But more recent comment now the dust has settled shows the government may be unlikely to prompt a raft of UK-based ETFs with this move.
Ben Seager-Scott, senior research analyst at Bestinvest, said while the removal of stamp duty was positive because it “removed an obvious impediment”, the chancellor’s announcement did not go far enough. “It might provide a bit more encouragement and make it a bit more attractive if other costs are also lower for domiciling in the UK, but it is a bit late coming,” he said.
“Had they done it years ago as ETFs started to take off in Europe then groups might have been more encouraged to base products here. There is a serious risk the UK has missed the boat on this. The ETF industry has grown massively in Europe because the UK is unattractive.”
Dennis Hall, founder of Yellowtail Financial Planning, which uses passive products, said there would still be issues because corporation tax in Ireland and Luxembourg is lower than in the UK, which could still put companies off in spite of the stamp duty abolition. “Is removing the stamp duty barrier enough of an incentive? I don’t know that it is,” he said.
“If there were two identical products – one in Ireland and one in the UK – I might choose the UK-based one, but if it was more expensive to operate that would come through in charges.”
MJ Lytle, chief development officer at ETF provider Source, said this was “the first step but we need the second step”.
Mr Lytle said a UK-based ETF would still incur capital gains tax and income tax – both of which are exempt in Ireland – and even though there was legislation to help UK funds claim tax back it “isn’t guaranteed you will get it all back”.
“To compete head-to-head, the UK would have to stop charging tax in the first place,” he said. Mr Lytle added while the move was an important one it was “not enough” and that he would be unlikely to consider launching a UK-based ETF unless other barriers were removed.
Matt Johnson, head of distribution for Europe, Middle East and Asia for ETF Securities, said it was “probably too early to discuss” whether it would encourage firms to domicile products in the UK, but “it certainly makes the UK market much more attractive for fund providers”.
Meanwhile, iShares’ head of UK sales Mark Johnson said it would “ultimately increase consumer choice and support the growth in the use of ETFs”.
Cold water poured on chancellor’s upbeat growth forecasts
Chancellor George Osborne painted a positive picture for UK economic growth in the next few years in his Autumn Statement last week.
He said the UK was growing “faster than any other major advanced economy” – although this was before the US revised its third-quarter growth estimate upwards.
But commentators warned that a “narrow-based” recovery was still fragile.
JPMorgan Asset Management’s chief market strategist Stephanie Flanders said the Office for Budget Responsibility, which made the forecasts the chancellor quoted, was “even more gloomy” in spite of the growth upgrades.
She said forecasts made in last year’s Autumn Statement of 1.2 per cent growth in 2013 indicated the most recent prediction of 1.4 per cent had “not changed nearly as much” as Mr Osborne claimed. “We should all hope that the future is a good deal rosier than the picture they have painted today.”
Smith & Williamson fixed income economist Robin Marshall said: “We still have the risk that this is an old-fashioned narrow-based growth recovery.”
