JEFF PRESTRIDGE: How you can keep your wealth out of Rachel Reeves' clutches if Labour win on Thursday... and where you will still be able to find investment opportunities
While Sir Keir Starmer may already have his right foot firmly planted inside Number 10 Downing Street, don't expect a future under Labour Chancellor Rachel Reeves to be the land of milk and honey that they promise.
A country, they insist, where rates of income tax, National Insurance and VAT won't rise, green energy will blossom, and economic growth abounds.
Far from it. Be warned. If you are a saver or especially an investor, a Labour government will soon have you in its sights with a barrage of tax increases that will bring tears of joy to the eyes of diehard socialists such as Jeremy Corbyn – and tears of financial pain to nearly everyone else.
Although the Conservatives under three Prime Ministers have done little over the past five years to make life easier for those determined to build their own financial castles, their actions will feel like a walk in the park compared to Labour's attack on personal wealth creation. All-out war is planned.
Unlike the Conservatives, the tax assault will be driven by different motives. While the Conservatives made life harder for savers and investors because of having to plug the deep financial holes left by both Covid and Liz Truss's disastrous reign as Prime Minister, Labour's attack will be ideological. It despises wealth creation.
Don't expect a future under Labour Chancellor Rachel Reeves to be the land of milk and honey that they promise, writes Jeff Prestridge
While Starmer and his financial lieutenant Reeves have so far refused to show their hand for fear of deterring voters, Labour Party sources confirmed just over a week ago that plans are already being drawn up to raise money through extra wealth taxes.
These include hikes to capital gains tax (CGT) and a reduction in the scope for individuals to shelter wealth from inheritance tax (IHT). Some of these ideas, aimed at 'unlocking wealth and putting it to work,' could frame Reeves' first Budget, likely to take place in the Autumn.
But they might be the tip of the iceberg. A dossier drawn up by the Labour Party's Tribune Group – a centre left cohort of MPs – proposes other tax hikes. Apart from CGT and IHT, it wants a more draconian National Insurance regime, reform of council tax bands (leading to higher taxes in wealthy areas) and a tax on 'extreme wealth'.
As Rishi Sunak said on Wednesday night in the last televised showdown with Starmer: 'Family finances are going to get hammered, taxes are going to get whacked up.'
'Uncertainty around the Labour Party's tax policy is the worst of all worlds,' says Nicholas Hyett, investment manager at Wealth Club, provider of investment services to high net-worth individuals.
'Taxpayers are not able to make informed decisions about their financial future. Fortunately, there are some common sense steps people can take to help mitigate any financial pain that lies ahead.'
So, how can you protect your wealth from Reeves' claws?
Here are some ideas. For the record, not all advisers contacted by Wealth & Personal Finance were prepared to share their thoughts for fear of diving into political waters.
Strange? After all, isn't most tax advice driven by changes to the tax system made by governments, blue and red?
Your capital could become their gain
Capital gains tax is charged on the sale of numerous assets –including investments, second homes and buy-to-let properties. The rate you pay depends on your taxable income and the asset sold.
For disposals of shares and unit trusts, basic rate taxpayers typically pay a 10 per cent CGT charge (maybe more), while higher rate and additional rate taxpayers pay 20 per cent. The tax is mitigated by an annual tax-free allowance of £3,000, meaning the first £3,000 of gains are CGT exempt.
While Starmer and Reeves have so far refused to show their hand for fear of deterring voters, Labour Party sources confirmed that plans are being drawn up to raise money through extra wealth taxes
Under the Conservatives, CGT on crystallised share gains has become more onerous. Although the tax rates are the same as when Boris Johnson won the December 2019 election, the annual tax-free allowance has shrunk like a vest given too hot a wash – from £12,300 in the tax year ending April 5, 2023 to £3,000.
Labour could shrink the annual allowance further, but it is more likely to push up CGT tax rates in line with income tax rates. The result would be 20 per cent CGT for basic rate taxpayers (potentially more) – and 40 and 45 per cent respectively for higher and additional rate taxpayers.
For example, take someone who in the current tax year has taxable income (after all allowable deductions and their personal allowance) of £25,000. This means their income is below the upper limit of the basic rate income tax band (£37,700).
Let us assume the taxpayer is not Scottish – income tax rates in Scotland are slightly different. Let us then suppose they crystallise a £25,000 capital gain from selling quoted shares. For CGT purposes, the taxable gain is £22,000 (£25,000 minus the £3,000 exemption).
As things stand, the individual has £12,700 of their basic rate band left. This means £12,700 of the £22,000 gain is taxed at 10 per cent, the rest (£9,300) at 20 per cent. The resulting CGT tax bill is £3,130. But if Labour aligned CGT rates with income tax rates – and did not touch the annual tax-free allowance – the CGT bill would be £6,260. The effective CGT rate would double to 28.5 per cent.
Escape the threat with a tax-free ISA
The key is to take advantage of tax-friendly investments such as Individual Savings Accounts (Isas). Any investment gains made inside an Isa are free from CGT. Currently, a maximum of £20,000 per tax year per adult can be invested inside an Isa. That means £40,000 for married couples and civil partners.
So use as much of your Isa allowances as you can afford – don't waste them. And if you don't have enough disposable income to fully fund an Isa, consider transferring existing shareholdings into them.
Jason Hollands is managing director of Bestinvest, part of wealth manager Evelyn Partners. He says: 'If you own investments in a taxable environment, it would be wise to move as much of these as possible into Isas, thereby protecting them from the taxman.'
This can be done through 'bed and Isa' – where shares are effectively sold and then bought back straightaway inside the Isa. The amount that goes into the Isa counts towards your £20,000 annual allowance.
Investing platforms provide this facility although they will charge – while 0.5 per cent stamp duty is payable on the repurchase.
Starmer and Reeves face questions from journalists during a visit to Morrisons in Swindon where they met shoppers and discussed the cost of living with employees this month
Investors also need to be aware that the bedding may incur a CGT charge if the gain exceeds the £3,000 nil-rate allowance. Bed and Isa can be used to shelter shares, investment trusts, exchange traded funds and unit trusts.
Another shrewd tactic is to transfer investments to your spouse or civil partner if they are on a lower income tax rate. Shares disposed of by a spouse who is a higher rate taxpayer will potentially attract a bigger CGT bill than a partner who is a basic rate taxpayer.
So it makes sense for the basic rate taxpayer to own more of the family investments.
Hollands says: 'Such interspousal transfers do not incur tax and can be a simple way to reduce a family's tax liability.
'Even where tax cannot be avoided, moving investments to whichever spouse or partner pays a lower rate of income tax can help reduce a tax burden.'
One final point on CGT. Wealth Club's Hyett says any shareholdings held outside of an Isa – and standing at a loss – should be left alone. They are better crystallised when (if) Labour hikes up CGT rates, offsetting gains made elsewhere and reducing the size of any CGT bill.
Inheritance tax is set to soar to new highs
The taxman continues to reap rich rewards from inheritance tax on the estates of those who pass away. IHT receipts for April and May this year were £1.4 billion, £0.2 billion higher than the same period last year. Under Labour, the take is likely to soar.
Currently, estates below £325,000 escape the 40 per cent tax. This nil rate band has not changed since 2009, although there is potentially an additional residential nil rate band of £175,000 for those who leave their home to a child or grandchild.
Labour is vehemently opposed to inherited wealth – and Left-leaning newspapers have already reported that 'significant' changes are afoot.
These include making it more difficult to leave assets such as farmland and private businesses tax-free. It could also bring pension funds into the IHT net – currently, most death benefits from pension schemes are IHT free.
Labour might also trim the gifts people can make to family and friends before death.
You can pass on up to £12,000 - tax free
Andrew Tully, technical services director at the retirement specialist Nucleus Financial, says individuals can currently pass on slices of their wealth through the use of permitted allowances, thereby reducing their exposure to IHT.
For example, annual gifts totalling £3,000 can be made – to one person or numerous people.
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'If you haven't used last year's exemption,' adds Tully, 'that can be employed too. So, potentially £12,000 for couples to pass on.'
In addition, annual 'small' gifts of £250 can be made to any number of people – with the proviso that they are different to any individuals in receipt of a gift made under the annual gift allowance.
Furthermore, gifts can be made to children, grandchildren or a friend when they marry or enter into a civil partnership.
And they can also be made out of 'normal expenditure' but Tully says 'complex rules' around these gifts mean individuals 'should seek advice'. The same applies to the use of trusts in moving assets out of a person's estate for IHT purposes. Chris Allen, director of wealth planning at private bank Arbuthnot Latham, says: 'There are various types of trust available to individuals, so it is key to receive specialist advice to ensure the correct one is set up.'
Here's wishing you all the financial best ... after the General Election on Thursday.
Cut tax liability with a pension
By the tax year beginning April 6, 2028, the Office for Budget Responsibility – a scrutineer of the country's public finances – estimates that three million more people will be paying 40 per cent tax than in the tax year starting April 6, 2022.
With little chance of income tax cuts under Rachel Reeves, Bestinvest's Jason Hollands says contributing to a pension is a key way to reduce an income tax liability. He adds: 'Pension contributions provide tax relief at an investor's marginal rate of income tax. So a basic rate taxpayer gets 20 per cent tax relief while a higher rate taxpayer gets 40 per cent.
'This relief is incredibly attractive, especially for the ballooning number of people paying higher rate tax.
'So take advantage of it while you can – because Labour could at some stage look to shave it or impose a flat rate.'
The maximum amount you can put into a pension in the current tax year – and benefit from tax relief – is £60,000.