Labour wins landmark landslide: What it means for you

As inevitable as death and taxes, when the UK went to the polls on Thursday, they voted pretty emphatically for a new Labour government. 

The job now falls to Sir Keir Starmer to officially form his government with permission from the king, decide who will be in his cabinet and then, when all this is done, undertake the task of running the country.

But what does all of this mean for you and your finances?

Taxes

In the short run, not very much. Rachel Reeves, seemingly having fewer concerns about the so-called ‘deep state’,  has already specified that she will wait for an official OBR forecast before making any decisions on any budget. So this means that it will be unlikely that there will be any meaningful announcements on changes to taxation or spending made until the Autumn.

Even then, it takes time to put the mechanisms into place, so it’s unlikely that any policy will be live until at least the following April, even possibly the one after (depending on the size of the policy).

Rachel Reeves and Sir Keir pledged in their manifesto that they wouldn’t increase income tax, national insurance or VAT, so it would be political suicide (think Nick Clegg) to hike those months after coming into office – unless they pulled a dramatic ‘Wow, there is much less in coffers than we expected’ (think Liam Byrne’s final Treasury note). 

However, Labour have been clear that they will introduce VAT onto private school fees – which were previously exempt due to their status as a charity. So we already know that this is an area where some of our clients will be affected. To what extent the schools pass on this increase remains to be seen and probably depends on the school itself.

One aspect that Labour have been quite coy on is capital gains tax. They have reasonably grand spending plans and I am slightly sceptical that they can cover these from private school VAT and changes rules on Private Equity fund managers alone. 

I’m speculating here, but I wouldn’t be surprised if we saw some sort of increase in capital gains tax rates. They are much more hamstrung, as Jeremy Hunt has already cut the tax-free allowance from £12,300 to £3,000, however there is a chance that they could tinker with the rates themselves – which are still well below income tax levels. 

Whilst we are speculating, this is another incentive – if you need another – to make sure that you make sure that you fill your tax wrappers before putting money anywhere else. Filling your ISA allowance and contributing as much as you can to your pension (with the increased allowance) is vital. On top of this you could look at some of the Gilts ‘below par’ that we have on our share investing platform. These will have low income however would expect to have a reasonable capital gain when the par is paid back – but Gilts are exempt from CGT. So these investments would also be immune to any changes in capital gains. (If you are unsure, please seek advice before making any investment – this is not a direct recommendation). For more information on this, please reach out to us.

There has also been a lot of speculation – fuelled mainly by the Conservatives – that the new government will ‘raid’ pensions. This most commonly has been touted as reducing the percentage of tax-free allowance that someone can take (already capped by Jeremy Hunt, actually). 

However, my guidance here is not to make any knee-jerk decisions with your pensions. As it stands, it is still a tax-free wrapper (in terms of CGT and income tax), and taking money out of this wrapper is almost guaranteeing that it could be taxable. Particularly with interest rates still high and markets performing well, anything above the £20k going into an ISA will likely be subject to income or capital gains tax. So taking money out of a currently guaranteed tax wrapper for fear of tax in order to put it into a taxable account doesn’t make a lot of sense.

As more details unfold, we will share more thoughts on how things can affect your individual taxes. 

UK Government bonds

This might not have been your first thought when the election result came out, however, Liz Truss and Kwasi Kwarteng gave us a not-so-welcome reminder of how politics can really affect bond yields and the various knock-on effects that follow.

UK government bonds are present in all of our Moneyfarm portfolios and will also likely be present in any workplace pensions you may have. Plus rates here can have an effect on things such as mortgage rates. 

What the bond market will be looking at will be, ‘Is this government credible to pay back debt?’, ‘Can they support their spending, or will they need to borrow more than expected?”

Early signs seem to be that the bond markets are pretty comfortable with this government, but this is an area that we will continue to monitor as it can be a source of volatility. 

UK equities

Every manifesto ever made has probably promised to deliver growth, however this was a big focus for Labour. Determined to show that they are a more centrist, pro-business Labour party they made it a centrepiece of their messaging (whilst somehow also assuring unions that they would be pro-worker as well). 

The effectiveness of these promises remains to be seen, but this could make the UK an area of interest for our Asset Allocation team and something we will monitor – particularly in the mid-cap space. The UK isn’t a large part of our equity allocation in the portfolios – on average around 10% of the equity. We are currently pretty content with this positioning, it is actually slightly higher than our usual levels.

If anything, other elections this year will be more relevant to determining our level of UK equities. With European markets having a wobble at the thought of the far right sweeping to power in the major nations and with a lot of uncertainty surrounding the US elections, if Sir Keir and his new government can start to deliver stable growth and can position the UK as a better trading partner to Europe, but simultaneously put the UK in a position to be favoured by an increasingly close bordered and protectionist US regime – then the UK may seem like an area of opportunity and perhaps sanctuary.

All will become clearer over the coming months, and we will share some more in-depth thoughts about the US election as we get closer to it. But for now, we are happy with our small allocation to the UK as part of our global diversification.

So long story short, for now, we don’t see any major changes or issues to address in light of the new government. It’s unlikely that any major tax changes will come into effect in the very foreseeable future, but I repeat that the best way to mitigate this is to use the tax wrappers that you have available to you.

From the perspective of our portfolios, we will certainly monitor the bond markets and assess if there are any opportunities in this new government in the equity space, but for now – we see no need for any knee-jerk reaction. 

As always, if you have any questions about this or anything else, I strongly encourage you to book an appointment with our team.