How to guard your investments and financial savings from Labour when you can

At last, it’s over. After six long weeks of excruciating, disingenuous and sometimes dishonest campaigning, Labour is back in power.

A stonking victory for Sir Keir Starmer and a devastating loss for Rishi Sunak, who was undermined by the legacy of Covid and Truss — and, at the end, by his party, officials, and Reform UK.

Yet the pain we have endured watching these two individuals frequently trade insults at each other — only lightened by Sir Ed Davey performing a series of circus tricks — will be dwarfed by the financial agony that Labour has lying in store for many of us.

Over the next five years, our savings and investments are going to be pick-pocketed like never before, as Rachel Reeves, Starmer’s financial enforcer, launches an all-guns blazing assault on our personal wealth.

Trust me, it will make what former Chancellor of the Exchequer Jeremy Hunt did, post the Liz Truss financial debacle, seem like a walk in the park.

Don’t believe me? Well, let me remind you what the left leaning Institute for Fiscal Studies (IFS) told us a few weeks ago. Irrespective of who won the election, the IFS said that the incoming government would have two choices if it truly wanted to keep a lid on public debt: either cut spending or raise taxes.

Labour, keen to embark on some grand spending initiatives such as the truly bonkers ‘green prosperity’ plan and feeding the ever-hungry NHS, will surely opt for the easier option — raising taxes.

Given it has already made a commitment not to hike income tax, National Insurance or VAT rates, wealth taxes will be firmly in their sights. As sure as night follows day.

Reeves could target our wealth quite quickly, although there are several ‘events’ that need to happen before we know what is up her sleeve.

There is the King’s Speech at the State opening of Parliament in 12 days’ time; the summer parliamentary recess; and then another parliamentary break for the season of annual party conferences in late September. (What fun Labour will have in Liverpool — and what misery will consume the Conservatives in Birmingham.)

While Labour’s manifesto commitment to impose VAT on private school fees will probably be included in the King’s Speech, this will be more a statement of intent. We will have to wait for Reeves’ debut (emergency) Budget to learn when VAT will be imposed and whether prepayment of fees will be prohibited.

Likely to take place in October, the Budget should also give us a clearer idea about what she really has in mind for our personal finances — and in particular, our savings and investments.

Income taxes, allowances… and a Chancellor bombshell in the offing?

What is unlikely in October are any proposed changes to the income tax system. That means the personal tax allowance should stick at £12,570, while the threshold at which 40 per cent income tax kicks in (£50,270) will stay the same.

Both were frozen by former Chancellor of the Exchequer Jeremy Hunt until April 2028 — and Reeves will be unwilling to unfreeze them, given the rich source of tax revenue they generate. This is a result of that horrible thing called ‘fiscal drag’ — more people being drawn into tax or higher rates of tax as allowances and thresholds remain set in stone.

What cannot be ruled out is a financial bombshell. Just cast your minds back to July 1997, when Gordon Brown launched an almighty one in his first Budget as Chancellor of the Exchequer in Tony Blair’s Labour government.

Brown’s £5 billion annual tax raid on company pension schemes, kept under wraps in the run up to the May election, proved cataclysmic. It accelerated the death of defined benefit company pensions, considered by most experts as the crème de la crème of retirement savings vehicles.

Most of these schemes have long since been wound up, shut, or sold to insurance companies, although scandalously they still exist in the public sector, in the process draining the taxpayers’ purse. Thank you, Mr Brown.

If Reeves decides to go down the ‘bombshell’ path, it could also be pensions related. For example, she could introduce a flat rate of tax relief on pension contributions — thereby ending the advantage higher and additional rate taxpayers currently enjoy. They respectively receive 40 and 45 per cent tax relief compared to 20 per cent for basic rate taxpayers.

Less controversial would be a targeting of capital gains by ensuring taxpayers pay the same rate of tax on sales of assets such as shares, private businesses and second homes as they do on their income.

A larger Inheritance Tax net – with fewer escape holes — is another option for a Chancellor desperately fishing for extra revenues.

So, how do you protect your wealth against the onslaught that Reeves will launch in the months and (five) years ahead?

Here are some simple steps you can take, although I must state that they are not 100 per cent Labour proof. After all, only Reeves (and Starmer) know the size of the financial hurricane coming our way.

Step one: Fill your boots with tax-friendly pensions and ISAs

The key to avoiding the full force of any future wealth taxes is ensuring that the bulk of your savings and investments sit inside tax-friendly wrappers such as pensions and Individual Savings Accounts (Isa) — even though Reeves may look to diminish their appeal.

On pensions, Reeves could look to restrict tax relief (as already mentioned), restrict the annual amount of money that can be paid into a plan (the maximum is currently £60,000), or scrap the 25 per cent tax-free lump sum people can take from their pension.

On Isas, she could similarly reduce the annual contribution limit, currently set at £20,000 (unlike pensions, Isa payments do not benefit from tax relief, but all proceeds from such plans are tax-free, unlike pensions where retirement income is subject to income tax).

Restricting future Isa or pension contributions would be unwelcome. Yet Reeves would truly over-step the mark if she tried to unravel these tax wrappers in any way.

For example, this could be done by applying a maximum lifetime limit on Isas above which any gains are subject to tax. Applying such a tax would be tricky, so it’s unlikely. And of course, it would provoke widespread outrage.

She could also look to re-impose the lifetime allowance on pensions that Jeremy Hunt axed — an allowance that meant people faced an extra tax charge when accessing big pension savings worth more than £1,073,100.

Reeves said she would reinstate it when Hunt announced its axing last year. But she seems to have backtracked on this threat.

So, my advice to you is simple. MAXIMISE YOUR PENSION AND ISA PAYMENTS NOW — just in case Reeves trims back the contribution limits.

If she were to get out her hedge-cutters and announce a trimming of the limits in her debut Budget, it would unlikely be introduced until the new tax year, starting 6 April, 2025. So, get saving into pensions and Isas now.

Early indications suggest that savers are already doing this. Official figures indicate that savers poured £4.2 billion of money into cash Isas in May, the highest May figure on record.

This tells me that people know Labour will soon be gunning for their wealth — and are therefore looking to protect as much of it as possible while they can.

And remember other savings and investment allowances

Outside of Isas and pensions, there are various allowances available to investors and savers that relieve the tax yoke. Most should remain intact under Reeves, having taken a pummelling under Hunt, but don’t count on it.

So, any reduction in the maximum amount of annual interest that can be earned from savings before tax kicks in — the so-called personal savings allowance — is unlikely.

This means basic rate and higher rate taxpayers should still be able to receive £1,000 and £500 of savings interest each year tax-free.

But for some people — especially those who don’ want to use their Isa to invest — it may pay to prioritise Isa cash savings for the time being.

This is because, once their cash is inside the Isa, it is immune from tax. Savers then no longer have to worry about whether their savings interest is breaching the personal savings allowance, making any surplus liable to tax at 20, 40 or 45 per cent.

Savers should also consider tax-free savings products such as NS&I Premium Bonds. All monthly prizes, starting from £25 to £1 million, are tax-free, and the current prize rate is equivalent to an annual interest rate of 4.65 per cent.

Of course, there is no guarantee that you will get 4.65 per cent — and this prize rate is likely to fall in the months ahead as interest rates in the wider economy fall. But equally, you could be lucky and get a higher return. The maximum holding per adult is £50,000.

As with the personal savings allowance, the amount of tax-free dividends that investors can earn annually from shares or investment funds (outside of an Isa) is unlikely to change from £500. After all, this allowance stood at £5,000 seven years ago.

But like cash savers, investors should ensure most of their dividends are earned within the tax-exempt shelter of an Isa. Any dividends that fall outside the annual personal allowance (£12,570) and exceed the £500 dividend allowance attract tax, starting at 8.75 per cent and rising to 39.35 per cent.

Finally, high-net-worth individuals could also look at specialist tax-efficient investments such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS).

These offer generous tax relief (30 per cent) on investments and, in the case of VCTs, the potential for tax-free dividends and capital gains.

But the tax-breaks are generous for a reason — the schemes use money raised from investors to back new businesses that are as likely to fail as succeed.

Although focused on attracting wealthy investors, Reeves could be minded to keep such schemes open. A Labour report published last year, Start-Up, Scale-Up, supported their continuation. Anyone contemplating such an investment must take financial advice.

Step two: Mitigating capital gains tax

Capital gains tax (CGT) is charged on the sale of numerous assets — including investments, businesses, second homes and buy-to-let properties. The rate you pay depends upon your taxable income and the type of asset sold.

For sales of shares and unit trusts, basic rate taxpayers typically pay 10 per cent CGT (maybe more), while higher rate and additional rate taxpayers pay 20 per cent. This charge is mitigated by an annual tax-free CGT allowance of £3,000.

Under the Conservative government, the CGT regime on investment gains has become more onerous, with the annual tax-free allowance shrinking from £12,300 in the tax year ending 5 April, 2023 to the current £3,000.

Reeves could well cut the annual allowance further. But the more likely reform is to align CGT tax rates with income tax rates. The result would be a 20 per cent CGT tax rate for basic rate taxpayers (potentially more) — and 40 and 45 per cent respectively for higher rate and additional rate taxpayers.

Anecdotal evidence from financial planners indicates that some high-net-worth individuals have recently sold assets such as businesses, listed shares, and property in anticipation of a Labour government.

Investors can mitigate CGT by holding listed company shares and funds inside Isas where investment gains accumulate tax-free. So, again, use your current £20,000 Isa allowance as much as you can afford to — don’t waste it.

And if you don’t have enough disposable income to fund an Isa, look to transfer existing shareholdings into a plan. 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 annual allowance.

Investing platforms provide this service, although they will charge. Stamp duty of 0.5 per cent is payable on the share repurchase (fund purchases do not incur stamp duty). Investors also need to be aware that the bedding itself may incur a CGT charge if the gain exceeds the £3,000 nil-rate allowance.

Another good 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 or non-taxpayer. So, it makes sense for the spouse who pays a lower rate of tax to own more of the family investments.

Such interspousal transfers are tax-free and apply to any financial asset — not just shares.

Any investments held outside of an Isa — and standing at a loss —– should be left alone. They are better crystallised when Labour hikes up CGT rates, offsetting gains made elsewhere and reducing the size of any tax bill.

Reducing exposure to inheritance tax

Labour despises inherited wealth, and it hasn’t concealed its hatred for it over the past six weeks.

It has already intimated that it will make it more difficult to pass on assets such as farms, private businesses and AIM-listed shares free from Inheritance Tax (IHT).

Reeves could also bring pensions inside the IHT net — currently, most death benefits from pension schemes are IHT-free.

At present, there are numerous allowances that individuals can use to pass on chunks of their wealth before they die — thereby reducing the value of their final estate potentially liable for IHT.

These include an annual gift allowance of £3,000 that can be made to one person or several people. If the allowance wasn’t used in the previous tax year (ending 5 April this year), it can be utilised too, meaning couples could pass on £12,000 to friends and relatives.

Annual ‘small’ gifts of £250 can also be made to any number of people — provided the recipients are different to any individuals who got a gift made under the annual gift allowance,

Furthermore, wedding gifts can be made to a child (£5,000), grandchild or great-grandchild (£2,500) or a friend (£1,000).

Other gifts can be made from normal expenditure, but they are mired in rules, so obtain professional advice. Trusts can also be used to move assets out of a person’s estate. Again, specialist advice is required to ensure the correct one is set up.

A final thought… 

Nobody knows exactly what awaits us in the months and years ahead — and the precise timing of the assaults on our wealth. Financial expert Jason Hollands, for example, thinks Reeves will not want to upset financial markets from the word go (a la Liz Truss) with big tax, spending and borrowing surprises.

He believes the Chancellor’s approach might be to launch a ‘slew of reviews and consultations’ — on pensions, Isas, and so-called tax loopholes. These will then pave the way for an assortment of tax raising measures.

Yet, his message to you is the same as the one I have made: Protect your wealth from Reeves while you can. There is no time like the present.