How you can protect your assets from a Labour government
By Merryn Somerset Webb
If the polls are even vaguely correct, Britons will vote for change in six weeks. The United Kingdom will have a Labour government a few months sooner than most commentators expected (although the exact date was predicted on the Merryn Talks Money podcast a month ago.) With that in mind, it’s worth asking what that might mean for your money—and if there is anything you can do in advance of an onslaught of new policy.
The first and most obvious thing to think about is your pension. Any new finance minister will be. There is more than £2 trillion ($2.6 trillion) held in pension funds in the UK and more than £50 billion given in tax relief on pension savings every year. That’s real money.
Labour has said it will rethink the abolition of the Lifetime Allowance, which limited how much you could have in your pension before you were taxed on it. It’s also likely to look again at how much you can take tax free from your pension. This used to be 25% on any pension but was recently capped at £268,275. A simple way to raise a little extra cash, now that the principle of a cap has been established, would be to cut this – and hence push up the tax take from pension spending. You might also expect there to be some tightening of the tax relief on pension contributions.
There is a also a reasonable chance that Labour will look again at the inheritability of pensions. At the moment, defined-benefit pensions can be left entirely tax free to your heirs if you die before 75, and are subject only to the beneficiary’s marginal rate of income tax if you die after that. That pensions are exempt from inheritance tax has always seemed odd to say nothing of a fiscal easy miss -- an inheritance tax on pensions would generate a chunk for the government but also incentivize the spending of more pension money, which would be subject to income tax.
Next up, pensions freedom. Rachel Reeves, who is likely to be our next chancellor of the exchequer, has, as Tom McPhail of the Lang Cat financial- services consultancy points out, been fairly clear that she is skeptical about people being able to withdraw any and all of their pension savings as they like. She may insist that an annuity is bought to provide a base income or that savers must prove a base income elsewhere before being allowed to cash in pensions. If that sounds familiar, it’s because it is. That is roughly how it worked before George Osborne’s reforms. Finally, there is the age at which you can start using your pension. Most people can now do that at 55. The withdrawal age is set to go up to 57 in April 2028. But even that seems low, given rising life expectancy and the increase in the state pension age. Pushing it out might make sense to a new government keen to nudge people into working for longer – and not running out of money too soon.
Outside pensions, savers might note the likelihood of an ideological shift to taxing capital from taxing income. That’s not to say income-tax rates won’t rise, or that the cuts in National Insurance won’t be reversed, just that it makes sense shorter term to have an eye on capital-gains tax. Labour has said it isn’t going up, but allowances might decrease further, and given that the new government will want to raise more cash, the rates still might rise. (A new government is sure to say that things are even worse than they expected, so they are very sorry but…). Any new higher rates are also unlikely to come with a re-indexing to inflation (Gordon Brown removed the indexing in 1997). That’s going to make it even more of a wealth tax than it already is.
There is also concern around the resetting of capital gains on death. At the moment, when you die and your assets are transferred to your spouse, any capital gains made are wiped for tax purposes — he or she starts again at the new higher cost base. That’s hugely valuable – it means a spouse can then sell all the assets entirely free of tax. Landlords might worry not just about tax changes (and the possible reversal of Jeremy Hunt’s cut to the level of capital-gains tax charged on second home sales) but also about the return of rent controls.
One final thing to worry about in the short term is school fees. Labour is very clear on their plans to charge value-added tax on these (regardless of the disruption it will cause and the small amount of money it will raise).
So what might the well-off do to mitigate all this? One answer is to get to their financial advisers and see what might work. They might look at paying school fees in advance. It isn’t clear that this will work as an avoidance measure, and you will need to check on the finances of your children’s school first. If it fails as a result of the tax rise, you will end up with neither an expensive education nor the cash you put aside for that education. Not ideal.
Those able to do so should ask about taking tax-free lump sums from pensions sooner rather than later, and those who haven’t yet saved up to the £1 million mark (the lowest point you might expect a new allowance to be introduced) should consider saving more if they can, particularly given the likelihood of the maximum annual allowance being cut. (It’s currently £60,000.)
On capital gains, investors with large gains may want to crystallize them promptly — maximizing allowances and using losses from previous years to cut the bill as much as possible. Finally, landlords keen to sell might want to think about speeding up. And if they are keen to make a reasonable return on holding on, they might want to ensure they have tenants they like – and renegotiate rents now.
The other answer to the question of what you might do is nothing at all. Many of the well-off have long said that they are happy to pay more tax if it means that public services are better and inequality reduced. This should be their chance to give that a go.