The Labour party have won the general election and Keir Starmer will be the next Prime Minister of the UK. A change of government brings new rules and legislation that may have an impact on your finances and plans for the future.
We take a look at the pledges made by Labour in their manifesto to see what changes are likely to occur in the coming months.
Pensions
Most significantly, Labour will retain the triple lock for the state pension. In their manifesto, they have stated that they will adopt reforms to ensure that workplace pension schemes take advantage of consolidation and scale. Their hopes are that this will deliver better returns for UK savers and provide greater productive investment for UK PLC. Whilst it is not yet completely clear how this will impact UK investors, it might mean that bigger, consolidated pension funds become available, and that these could offer lower fund management charges.
Labour will also undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets. There is already an abundance of investment funds covering UK equities, so this would need to take some form of incentive to encourage higher investment in UK shares. This is also true of the planned intention to get UK pension funds investing more heavily into the UK stock market.
Labour has announced that it will not reintroduce the Lifetime Allowance but will instead leave the current regime in place for the time being, until the planned review is completed.
Non-dom status and IHT
Labour have made it clear that in their ‘first steps for change’ they will abolish non-domiciled status (‘non-dom’). This will only affect a small number of individuals across the UK, but they tend to be some of the wealthiest.
Domicile is a concept that does not exist in most other countries’ legal systems, which tend to only recognise residency. Residency is where someone is physically located in any particular year. This is based on a number of tests including amount of time spent, ties to the country, and other factors. Domicile is a more abstract concept that can best be understood as ‘someone’s ultimate home’, or ‘the place to which the person will ultimately return’. A person can be UK resident, UK domiciled, neither, or both.
All UK residents pay UK tax on their UK income, gains and inheritable estate. Someone who is non-dom will pay UK taxes on their UK income, gains, and inheritable estate, but not on their non-UK income, gains, and inheritable estate, unless those assets are brought into the UK. This is known as the ‘remittance basis’. Abolishing non-dom would mean that these individuals would be taxed on their worldwide assets.
The unknown factor here is whether this move will or will not generate net tax revenue compared to the cost of implementing it, and the plan is controversial for this reason. Non-domiciled individuals tend to be highly wealthy and globally mobile, and may leave the UK if they feel that their assets are being taxed more than they wish.
As an example, there is no inheritance tax in India. Someone who is resident in the UK but domiciled in India (i.e. ‘non-dom’) will pay UK IHT on their UK assets, but not their Indian assets. If the Indian assets are brought into the scope of UK IHT by this change, the question is then whether the investor chooses to remain in the UK, or moves elsewhere.
Labour have also pledged to end the use of offshore trusts to avoid inheritance tax (IHT). These are known as ‘excluded property trusts’ – they are not a means for people from the UK to avoid tax, but are created by people who move to the UK and historically wanted to exclude the property they owned from their country of origin from UK IHT. Ending the IHT exemption on these will bring them fully into UK IHT.
Taxation
Labour have made it clear they will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT (with the exception of private school fees). These are some of the biggest generators of tax income for the government, which means that they will need to draw on other sources of potential revenue such as Capital Gains Tax, the Oil and Gas levy, or other revenue streams. These have not yet been published but will be in due course.
Labour have stated that they will end the VAT exemption and business rates relief for private schools in order to invest in state schools. This could mean that private schools increase their fees in the coming years to make up for the loss of benefit.
Great British Energy
Labour plan to set up a publicly owned company known as Great British Energy, to help cut energy bills and boost energy security. This is not intended to be an energy-generation company, but is an investment company that will be seeded via £8.3 billion of public money. The plan is that this will then solicit around a further £15-£20 billion from the private sector to invest into clean energy projects.
This is intended to help lower the cost of UK energy bills, but it will do so indirectly because Great British Energy is an investment vehicle, not a power generator. Much will depend here on which projects come under the management of the company, and how much additional private funding can be secured.
Corporation tax
Labour will cap corporation tax at the current level of 25% for the entire parliament and will act if tax changes in other countries pose a risk to UK competitiveness. This will be welcome, as Corporation Tax was raised to the current level by the previous government, from a prior level of 19%.
They pledge to retain a permanent full expensing system for capital investment and the annual investment allowance for small business. This is more advantageous for large businesses rather than small ones, though in theory all business can benefit. It is of most use to those companies that invest in plant and machinery, as these costs can be fully laid off against Corporation Tax. Labour also promises to give businesses greater clarity on what qualifies for allowances to help improve investment decisions.
Mortgages
One of Labour’s statements in their manifesto was to be tough on government spending rules in order to keep mortgages as low as possible. This is because mortgage rates are linked to UK government bond rates, and the UK government needs to borrow many billions of pounds each year from the bond market. Bond investors will only lend their money if they feel that they are being adequately paid for the level of risk they are taking. This is why the previous ‘mini budget’ of Liz Truss caused a temporary spike in mortgage rates – because her package of tax cuts caused bond investors to believe that the creditworthiness of the UK government was in question.
Labour’s plan is to create a permanent, comprehensive mortgage guarantee scheme in order to support first-time buyers who struggle to save for a large deposit, with lower mortgage costs. This is a kind of ‘demand side’ reform, as it aims to help access to property. This is in contrast to the proposal to build more houses, which is a ‘supply side’ reform.
With a new government in power, we could see more legislative changes in the coming months and an interesting Autumn Statement delivered by the new Chancellor Rachel Reeves. We will keep you up to date on any fiscal modifications that may impact you, your family and your financial plan.
If you would like to speak to one of our financial planners, please get in touch.
