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Preparing for a change of government

Posted by: Brian Dennehy
Membership level: Free
 
The odds of a General Election in the next year are now about evens (11/10 with Corals). The odds of Jeremy Corbyn being the next Prime Minister are 9/4. Whatever your political persuasion it is a good time to consider what might happen under a Labour administration, and how you might prepare.
 
It was Jim Callahan who recognised that there are quite big waves in politics:
 
“There are times, perhaps once every 30 years, when there is a sea change in politics. It then does not matter what you say or what you do. There is a shifting in what the public wants and what it approves of.”
 
Back then the “shifting” was to Thatcher. Now it might be to Corbyn.
 
Although the greatest concern expressed in the media and beyond is of a Corbyn-led Labour government, it shouldn’t be forgotten that it was former Chancellor Philip Hammond who said that taxes need to rise. It is reasonably clear that the UK government, in common with many others in the developed world, is living beyond its means. It is equally clear that the costs of government will inexorably keep rising as the population ages.
 
This is unsustainable. Something has to change, whatever the hue of the government.
 
For now, let’s assume it is Jeremy Corbyn. This list is based on some actual statements, some sensible assumptions, and some speculation. To be fair, most of these would be denied by Jeremy Corbyn if we were now midst a General Election campaign – which Boris Johnson seemed to kick-off yesterday!
  • The top 5% of earners will pay more income tax. That is people earning more than £73,500 a year, who coincidently already pay more than half of all income tax.
  • Assume 45% income tax on earnings over £80,000, and 50% on income over £123,000.
  • Capital gains tax will increase to 28%.
  • The insurance premium tax on private healthcare will increase.
  • Tax shelters such as ISAs and pensions and VCTs are likely to come under attack.
  • The greatest pain will be felt by those with income between £80,000 and £200,000, rather than those with the very highest incomes.
  • Higher rate tax relief on pension contributions will be scrapped, and tax-free cash will be abolished or limited. The inheritability of pension funds will also come under scrutiny.
  • A variety of aspects of inheritance tax might be reformed.
  • The pressure on those owning second homes will increase.
  • A mansion tax has been mooted in previous years, but is probably impractical. Higher tax on second homes is more likely.
  • Capital controls, that is restrictions on the flow of capital in and out of the country, feel like a remote possibility, but the possibility shouldn’t be ignored in extremis.
  • Corporation tax will be increased to 26%.
  • Entrepreneurs Relief will be reformed. Either the relief will go down, or the level at which it applies will come down, possibly both.
  • The undistributed profits of small companies, “close” companies controlled by five or fewer people, could be taxed as though they have been distributed to shareholders.
Personal action?
  • Make sure you maximise contributions to tax-advantaged wrappers such as pension, ISAs, VCTs before the rules change.
  • Consider taking the tax-free cash earlier than required, in case this benefit evaporates.
  • Realise capital gains at the current lower rates if you can.
  • Consider making gifts, for example to a spouse who is in a lower tax band.
  • Consider gifting property or other assets to children.
  • Business owners might bring forward dividends and bonuses and capital gains while tax rates are lower.
  • Small business owners may act now to take advantage of Entrepreneurs Relief.
  • Bring forward bonuses and other earnings where possible.
  • Where you have an overseas property, consider depositing somewhat more at a local bank.
  • Where you have the option for a non-UK passport, take advantage of this. This always makes sense whatever the government.
  • Don’t assume that setting up trusts may have the desired effect. Not only will the tax benefits of these be subject to review, but Labour has also said they want to see the public disclosure of trusts, and this creates the risk of trial by media and the witch hunts.
  • In contrast arrangements outside the UK tax jurisdiction might still have some value, but can be both complex and expensive.
Make sure you seek independent and expert advice on each of the above, particularly the latter two, but also on topping up pension contributions – which is much more complex right now than it should be.
 
On the assumption that the pound would weaken, this creates opportunities. For example, UK companies which derive a lot of their earnings from overseas will be more valuable when those earnings are converted back into sterling. Similarly investments in overseas stock markets and bonds.
 
In contrast, some sectors of the UK stock markets will be hurt more than others. For example, the popular infrastructure sector would be hurt by Labour plans to nationalise in some areas and take control of Private Finance Initiatives (PFIs).
 
Those with larger mortgages might also want to consider fixing their interest rates for a number of years.
 
Some buy to let landlords are already selling part or all of their portfolio to lock in the current levels of capital gains.
 
That’s it for now. Doubtless such speculation will evolve when a General Election gets closer. For now, perhaps take the opportunity to review your arrangements and, where you feel appropriate, seek advice and take action before the atmosphere becomes even more febrile.

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Topic: Market commentary


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