The end of Theresa May’s unhappy three years in Downing Street naturally focuses attention on the identity of the next Prime Minister - perhaps more importantly, however, it is shining the spotlight on who will be the one after that. At an investor event I hosted last week, the conversation had clearly moved on from Brexit to the possibility of life under Labour. The key questions: what would it mean and what can we do?
Jeremy Corbyn has never been particularly interested in Brexit. He believes the real divide in Britain is between ‘the many who do the work, create the wealth and pay their taxes, and the few who set the rules, reap the rewards and dodge their taxes.’ A great many people may be surprised that our potential next-but-one PM sees them in that second category - and they would be wise to start thinking about what a Labour government might mean for their personal finances and investments.
It is sensible to take seriously the possibility of a change of government, not just because the incumbents have made such a Horlicks of Brexit but because Corbyn would be pushing on an at-least-partially-open door. As Jim Callaghan recognised, the comings and goings of governments happen within a bigger framework. ‘There are times, perhaps once every thirty years, when there is a sea-change in politics. It then does not matter what you say or what you do. There is a shift in what the public wants and what it approves of. I suspect there is now such a sea-change and it is for Mrs. Thatcher.’
Well, it has taken 40 years, but the pendulum is swinging back again and the memories of a significantly large proportion of the electorate are short enough that the 1970s are the stuff of history books not personal recollection. There are also more than enough people for whom the experience of the last 40 years has been quite different from that of most people reading this. So, we should understand what a Labour government is planning and consider what to do about it.
The first area to focus on is personal taxation and pensions. You have to be quite close to the end of your career now to remember basic and higher income tax rates of 35% and 83% respectively and it is quite unlikely we would head back to that kind of confiscation any time soon. But it is Labour’s stated policy to re-instate the 50% additional rate for top earners and to introduce a 45% rate for those earning at the less than fat-cat level of £80,000. Pension tax relief for higher-rate tax-payers is very unlikely to survive. Recent cuts to capital gains tax are likely to be reversed. The simplest ways of avoiding inheritance tax will probably be closed off and if you pay school fees you should expect them to incur VAT soon after Corbyn and McDonnell enter Downing Street.
These are just the likely changes to existing taxes. Potential additions include a financial transactions tax to raise up to £5bn a year and a wealth tax on assets to fund social care. In 2012, Labour floated the idea of a one-off 20% wealth levy to reduce government debt.
As well as our personal taxes, we also need to consider the impact of a Labour government on our investment portfolios and pensions. Top of the list of concerns here is Labour’s clearly-articulated re-nationalisation policy with energy, water, the railways and Royal Mail in scope to be taken back into public ownership. It is not just what might be returned to the public sector but how it happens that is concerning investors and pension trustees alike.
When the Attlee and Wilson governments took control of privately-owned assets, they at least paid shareholders the market price for them. There is no guarantee that this would be the case under a Corbyn/McDonnell re-nationalisation programme. The current Labour plan would assign a value that takes into account ‘pension fund deficits; asset stripping since privatisation; stranded assets; the state of repair of assets; and state subsidies given to the energy companies since privatisation.’ Labour’s valuation of the water industry on this basis is rather less than half the price put on the companies by the stock market, for example. It remains to be seen what the learned friends of the foreign owners of these assets make of such a confiscatory proposal.
The loss of trust in Britain as a reliable destination for capital, supported by the rule of law, leads in turn to the less predictable consequences of a radical Labour government - sterling weakness, capital flight, falling share and government bond prices, higher interest rates and inflation. Of course, not all of these will necessarily come to pass. The UK stock market, for example, already prices in more than a little bad news. And a weaker pound would make British assets seem even cheaper to overseas buyers.
But they are all entirely reasonable assumptions to make. So, while they still remain in the realm of possibility, what should we do to protect ourselves against the worst?
When it comes to our personal finances, I would consider and take advice on the following: using up the full pension allowance, including any carry-forward from the past three years; maximising contributions into an ISA for self and spouse; using the capital gains tax allowance for any investments held outside tax-wrappers; asking the bursar whether you can pay school fees in advance; transferring assets to a spouse in a lower tax band; and possibly gifting property to children.
As for stock market investments: be well-diversified geographically (the UK stock market represents only 6% of the global market - don’t be too overweight despite the apparent value in British shares); look under the bonnet of your UK funds to avoid companies that will obviously be caught in the Corbyn trap; and consider at least a small weighting to traditional hedges against uncertainty like gold. Maybe the past three years haven’t been so bad after all.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.