Labour government: What now for your savings and investments?
As widely anticipated, last week’s UK election delivered a clear majority for the Labour Party. But with Keir Starmer free to forge ahead with policy changes, many will be wondering how the new government plans to deliver on manifesto promises while still balancing the books. In this article, we explore how your savings and investments may be impacted. What’s more, should you consider taking steps to protect your financial position?
How has the change of government affected markets?
Everyone expected this resounding Labour majority, and as a result there has been a fairly muted. reaction in the financial markets. In general, the mood was upbeat as people perceived the new government as offering stability. We saw no discernible movement in bonds or currency markets, due to the vote alone. Meanwhile, the FTSE 250 rose 1.8% in early trading after the election. Share prices of housebuilding companies in particular have risen. This is due to Labour’s planning reforms that will enable more development.
What about the economy under Labour?
Keir Starmer has focused on delivering economic stability, with a fiscal approach that is pretty similar to that of the Conservatives. A prudent approach to spending is largely expected. And with UK inflation now at 2%, it is expected that inflation will continue to decline. Indeed, we should see cuts in interest rates later this year. Much of the Labour election campaign seemed to centre on competency and stability, as opposed to offering a different ideology to a Conservative government.
Where might tax rises come from?
What is reassuring to many is that Labour has consistently vowed not to increase income tax, VAT, National Insurance or corporation tax. In addition, new Chancellor Rachel Reeves last year ruled out a wealth tax – though this was not in the manifesto. However, it seems inevitable that taxes will rise one way or another. Even as things stand, the continued freeze on tax-free personal allowances, and on National Insurance thresholds, means that people will pay more tax as inflation rises.
The Labour manifesto pinpointed changes that will tend to affect the wealthier. The most talked about measure is that VAT is to be applied to school fees, and private schools will pay business rates. Below, we look at other areas where Labour could increase tax revenues or reduce tax relief.
Will inheritance tax rise?
There has been much speculation about Labour’s intentions regarding inheritance tax. The manifesto revealed little, apart from stating that offshore trusts would be brought within the scope of inheritance tax.
It is possible that the headline rate will increase, but perhaps more likely that there is a tightening of rules around inheritance tax. For example, the Government may decide to charge capital gains tax on estates. Another way of increasing tax revenues might be to change the law around gifts to individuals. Currently such gifts are exempt from inheritance tax if the donor survives seven years from making the gift. This is known as a Potentially Exempt Transfer or PET. The seven-year window might be extended. Alternatively, a ‘gift tax’ may be introduced.
The government could consider changes to specific tax reliefs that currently apply, for example inheritance tax relief for business property and agricultural land.
Pension savings
Labour ruled out reintroducing the Lifetime Allowance that was abolished by the Conservatives earlier this year. However, the Government may look at other aspects of pensions.
One obvious move would be to reduce the tax relief on pension contributions. Pension savers currently receive tax relief on contributions at their highest rate of income tax: 20%, 40% or 45%. Some feel this is gives too much relief to higher earners. It’s possible that Labour could decide to reduce tax relief for higher earners. Alternatively, they could replace the current bands with a flat rate.
Another option could be to review the tax-free lump sum. Since 2014, savers aged 55 or above have been able to take 25% of any private pension pot as a tax-free lump sum.
Capital gains tax
The Labour manifesto was mostly silent on capital gains tax, but this is an obvious area for tax rises as it is currently charged at lower rates than income tax.
Basic rate taxpayers pay 10% on capital gains when they sell valuable assets such as shares, art or fine jewellery worth over £6,000. This rises to 18% on residential property that is not their main home. Meanwhile, higher and additional rate taxpayers pay 24% on gains from residential property and 20% on gains from other chargeable assets. This is favourable compared to income tax rates: 20% in the basic rate band, 40% higher rate and 45% additional rate.
Labour’s manifesto only mentioned changing the CGT rules for managers working in the private equity industry. However, other parties have talked about raising CGT in line with income tax.
Tax on investment dividends
No mention was made in the Labour manifesto about tax on dividends. Currently you can receive £500 per year in dividends without paying tax. As with CGT, tax rates for dividends are lower than income tax rates. They are: 8.75% at the basic rate, 33.75% at the higher rate and 39.35% at the additional rate. It would be possible to remove the allowance altogether, and/or increase the tax rate. It is prudent to keep as much as possible invested via ISAs.
Could house prices fall under Labour?
UK house prices have risen faster than the those in the rest of Europe due to insufficient supply. If Labour is successful in building more houses by changing planning policy, then it is possible that house prices will rise less quickly. That said, there are many factors influencing house prices, such as demographic changes, economic conditions and interest rates.
How will non-UK residents, non-doms and people with off-shore trusts be affected?
The non-dom regime is due to be phased out in April 2025 and everyone moving to the UK will pay tax on foreign earnings after the first four years of living here. Under Conservative plans, there would be a 50% discount on the tax owed in foreign income in 2025-26. Labour has said this discount won’t be introduced.
For non-UK residents buying property, stamp duty is set to be increased by 1%.
It is also planned that offshore trusts are brought within the scope of inheritance tax (IHT).
What can you do now to protect your savings and investments?
It’s almost certain that tax burdens will rise due to freezes in the personal allowances and other taxes mentioned above. Take every opportunity to maximise savings in tax efficient vehicles such as ISAs and pensions. A wealth manager will help you explore other options, such as the more complex areas of inheritance tax planning.
AJB Wealth’s Managing Director and Chartered Wealth Manager, Paul Willans, commented, ‘While the tax tail shouldn’t wag the investment dog, when reviewing a prospective client’s financial arrangements, we often find a number of easy wins. These can add up to savings of tens, or hundreds, of thousands of pounds.’
In an upcoming blog, we’ll be examining the tricky question of whether you can afford to give away your money now, and how to go about it in order to achieve your aims most in the most effective and efficient manner.
The highly qualified team at AJB Wealth is well placed to help you plan your financial future and make your assets grow. To discuss your situation, please book an obligation-free consultation, or call us on 01428 774 070.
Important: The content of this bulletin is for general consideration only and does not constitute advice. No action must be taken, or refrained from being taken, without advice and this company accepts no responsibility for any loss occasioned as a result of any such action, or inaction. Tax legislation is subject to change without warning and you are also reminded that investments can fall, as well as rise. In the event of early encashment, you may receive less back than your original investment.
