Defections and expulsions from the Conservative party (and disagreements with the DUP) mean the current government no longer has a working majority in the House of Commons, paralysing its ability to legislate without support from across the chamber. But at the fourth time of asking, Prime Minister Boris Johnson has won the support of MPs for an early election to try and break this political stalemate.
The potential consequences of a left-wing Labour government have been a common theme in many of our communications with clients and prospects in recent years. This was echoed in our Passing on Wealth research this year, in which surveyed clients identified a change in government and changes in tax rates as the primary concerns related to their financial wellbeing. Clients, on the whole, appear more concerned about Jeremy Corbyn than about Brexit.
While not all clients see a change in government as their primary concern, or even a concern at all, we consider below what changes a Labour government led by Jeremy Corbyn might wish to make, their prospects of doing so, and what actions we believe individuals should be taking, if any, to maintain their financial wellbeing, come what may.
As is typical of any party in opposition, Labour has been keeping its cards close to its chest when it comes to the finer detail of proposed policy. Nevertheless, as the last election was only just over two years ago and most key opposition party figures remain the same, Labour’s manifesto then provides a starting point for an educated guess at their current thinking.
On personal tax, that manifesto proposed higher rates of income tax for those with incomes of more than £80,000 per year, including headline income tax rates of 45% on income between £80,000 and £123,000 and 50% above £123,000. It seems likely that similar proposals will feature again soon.
At the last election, Labour proposed realigning Capital Gains Tax (CGT) rates at 18% for basic rate taxpayers and 28% for higher rate taxpayers (currently the gains on second homes and buy-to-let properties are taxed at these rates, but the gains on investments besides residual property are taxed at 10% and 20%). Labour also proposed abolishing the relatively new (and complicated) “residence nil rate band” that reduces the Inheritance Tax (IHT) payable on some estates.
Left-leaning think-tanks have since published reports suggesting more radical changes to CGT and IHT. On CGT, these proposals have included re-aligning CGT rates with (higher) income tax rates, markedly lowering the annual CGT exemption, and reconsidering the blanket CGT exemption on death.
On IHT, proposals have included the abolition of non-domiciled status, and even the replacement of IHT with a lifetime gifts tax levied on beneficiaries, with perhaps the first £125,000 received tax-free and the rest potentially taxable as income. Though these are not official Labour Party policy, they may become so, or influence the policies that are adopted instead.
Similar reports have also made sweeping proposals in relation to property. These include an explicit goal of stabilising land values (to bring an end to house price inflation), enhanced rights for tenants in the private rental sector (such as capped rental increases and longer tenancies), and changes to the taxation of property. Council tax would be replaced by a more progressive property tax levied on owners rather than occupiers, alongside the abolition of stamp duty on main residences. Again, it remains to be seen to what extent such proposals are adopted as official Labour Party policy.
The last Labour manifesto also included a wide raft of policy proposals relevant to companies, including higher corporation tax rates (26% rather than 19% currently), a higher National Minimum Wage of £10 per hour, and an “excessive pay levy” (of up to 5%) on companies paying individuals more than £330,000 per year. It also proposed extending the stamp duty payable on share trades to a wider financial transaction tax levied on trades in other asset classes such as corporate bonds and derivatives (a form of Tobin tax). And since the last election, Labour has publicly committed to a 32-hour working week, and plans to gradually transfer 10% of the shares in larger companies (worth some £300 billion) from current shareholders to workers (who would receive dividends from these of up to £500 each per year, with any excess going to the government).
Turning to the wider economy, the last manifesto promised to use higher tax revenues to increase day-to-day levels of public spending (levels that the Conservatives have actually matched in the last couple of years, as austerity has been eased) and to borrow more (at low interest rates) to fund the renationalisation of water and energy companies, the railways and the Royal Mail and investment in major new infrastructure projects.
Concerns have been voiced that such changes might impact the attractiveness of Britain as a place to do business, put the brakes on economic growth, push up interest rates and public borrowing costs, and hit the value of UK shares, gilts and the pound. In response, Shadow Chancellor John McDonnell at one time casually mentioned that all options would be on the table to stop a run on the pound, including capital controls, though he has since said, “I want to make it absolutely explicit that capital controls would not happen under a Labour government.”
Finally, the cost of private education could rise under Labour plans to levy VAT on school fees and to remove the charitable status of private schools, and there has been (as yet unsubstantiated) speculation that Labour might move to tax the wealthy in other ways, such as through a wealth tax.
Wealth tax or not, a Labour government led by Corbyn and McDonnell would be less accommodating to the wealthy than the Labour governments of Tony Blair and Gordon Brown.
For as long as Labour remains in opposition, such ideas might shift the Overton window (the range of acceptable public discourse), but Labour would need to win power to bring those ideas to life. As things stand, that looks unlikely. Most recent polls have Labour as 5 to 10 points behind the Conservatives, with Labour’s share of the vote around 25% (compared to a 40% share of the vote at the last election, which left them 64 MPs short of a majority). And while Corbyn is still popular with many on the left, his national approval ratings have also plummeted since 2017, with recent polls showing nearly three times as many disapprove of his performance as approve.
For those wary of recent polling misses, bookmakers are offering odds as long as 20/1 on a Labour majority government. Even if Labour were to overcome those odds, it is worth remembering that Corbyn does not lead a unified Labour Party. As big as the rifts within the Conservative Party over the European Union are, those within the Labour Party over economic policy, foreign and defence policy, and anti-Semitism are arguably just as wide. Most Labour MPs do not consider themselves as left-wing as Corbyn or McDonnell, both of whom are known to have their opponents within the party. To be able to pass the most contentious legislation, we expect that Labour would need a majority of at least 30 to 40 seats to overcome the votes of rebel Labour MPs. That seems a long way off, unless Labour enters into coalition with the Liberal Democrats and/or SNP.
However, the Liberal Democrats have ruled out any Corbyn-led coalition due to fundamental differences of opinion over Brexit, and their MPs would be wary of being the junior party in a coalition again, after they were so badly punished in the 2015 polls. Any pact with the SNP would doubtless require the concession of another Scottish independence referendum, a high price for Labour to pay. Never say never again, but the odds on such coalitions are almost as long as those on a Labour majority government.
Finally, politicians of all stripes find their stated ambitions on the campaign trail do not readily translate into policy when faced with the reality of government. Regardless of developments in the coming weeks, Brexit will continue to consume time and resources. Radical policies that create clear winners and losers will be lobbied against and protested, in the courts if necessary, and some professional advisers will devise means of mitigating the losses of those who can afford their advice. In power we would expect many of Labour’s policies, whatever they may be, to be watered down, kicked into the long grass or simply abandoned altogether. Any that do become law may not outlive a Labour government, particularly if they have an adverse effect on the economy, as some fear.
Regardless of one’s views on the likelihood or impact of a change in government, first and foremost our advice is not to panic. Our prudent investment management and financial planning have seen clients safely through the global financial crisis of 2007-09, the European debt crisis of 2011, the Brexit vote in 2016 and the election of President Donald Trump that same year.
Looking further back, whatever a change in government may bring, it is unlikely to prove worse than the Wall Street Crash of 1929 and subsequent Great Depression of the 1930s, the Second World War, or the stagflation of the late 1960s and 1970s, worst-case scenarios that are used to stress-test our clients’ retirement plans.
We believe diversification is key to protecting wealth and achieving financial wellbeing so is baked into what we do for our clients. This includes diversifying across asset classes (as well as within those asset classes), across different currencies, across different tax wrappers and tax allowances, and across different sources of capital and income. All of these are mainstays of our approach to investment management and financial planning. Changes that affect equities may not affect shortdated bonds, those that affect UK companies may not affect multinationals with global revenue streams, and those that affect buy-to-let properties may not affect pensions or ISAs.
Similarly, liquidity and flexibility are intrinsic to the planning we do for our clients, with almost all of our recommended investments offering at least daily trading and having no entry or exit charges. That means we can react quickly to any material developments, such as a change in government.
We view capital controls as highly unlikely, a measure of last resort that has never been used in a major economy at the heart of the globalised world in which we now live. Those with meaningful expenditures in other currencies might wish to consider an overseas foreign currency bank account for some of their cash, and for some an offshore bond and/or Venture Capital Trusts (VCTs) may be appropriate diversifiers. However, other more aggressive actions are likely to incur significant fees and taxes and may not be effective, particularly if a Labour government pursues those engaging in aggressive avoidance measures.
In terms of investment approach, we recommend sticking to an investment strategy based on economic and corporate fundamentals, rather than fast-shifting political sentiment. A Labour government might even present opportunities for long-term investors.
If the pound weakens further, companies with global revenue streams, no matter where they are listed, should appreciate in sterling terms. Meanwhile, many UK-listed companies have strong business models and robust balance sheets but already trade at attractive discounts to the valuations of overseas peers. In other words, concerns around Corbyn and Brexit are already factored into prices, even though these companies are very likely to still be around (and highly profitable) when Corbyn and Brexit occupy the rear-view mirror.
Finally, tax efficiency is key to ensuring that investors retain as much of their returns as possible. We recommend ensuring that you are using the valuable (and widely recognised) tax allowances available now.
That includes maximising pension and ISA contributions and using annual tax-free income allowances and CGT exemptions, where appropriate. Those with children or grandchildren in private school might want to consider the prepayment of fees without VAT. And those concerned about potential changes to IHT may wish to think about bringing forward gifts and other estate planning strategies, to take advantage of the current known environment.
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