Throughout the general election campaign, Labour officials insisted there were “no plans” to raise taxes beyond the pledges made in their election manifesto.
However, given the fragile state of the country’s finances, the wealthy and their advisers are expecting future tax increases now that the party has taken control of the seat of government.
Labour’s landslide victory was secured in part by a pledge not to raise income tax, national insurance, value-added tax or corporation tax rates – the “big four” taxes that account for around 75% of annual tax revenue.
This means that there is limited flexibility if economic growth falls short of expectations. As a result, speculation about what tax leverage might be used in the future has become a hot topic among advisers and their clients.
Predicting potential changes to tax rules is risky. But high-income and wealthy individuals are now weighing the risks of taking preemptive action against the potential benefits of lowering their future tax bills if their strategies succeed.
Beyond moving abroad, here are four ways the wealthy are protecting their finances from potential future tax increases.
Restructuring your investment portfolio
Advisers suggest that changes to capital gains tax could be a covert way of imposing a wealth tax. Gains on investments held outside pensions and individual savings accounts are currently taxed at 20%: a historically low rate for the UK and relatively low compared with the US and Europe.
Wealth managers say the sell-off began with concerns among some wealthy clients that Labour would raise capital gains tax rates, potentially bringing them into line with rates on dividends or income tax.
“We’re seeing people take action and reassess their portfolios, selling assets now to crystallize 20% gains in the hope that this will protect them from higher tax rates in the future,” says Catherine Waller, co-founder of Six Degrees Wealth Management.
She adds that many of her clients, who are entrepreneurs, have large tax losses that are allowed to offset gains, making a pre-emptive capital gains tax more acceptable. Another strategy involves storing up any allowable losses for future use if capital gains tax rates rise, although Waller fears that Labor will impose a time limit on such losses. “It is also possible that capital losses could be capped in the future,” she says.
Christine Ross, client director at Handelsbanken Wealth, points out that her clients carefully re-arrange their portfolios. “They generally sell[a share of stock]and immediately buy back similar investments to pay the current capital gains tax rate. The shares need to be different, because UK tax rules disqualify this form of planning if the same shares are bought back within 30 days of the sale,” she explains.
Investment platforms report that clients are selling shares in general investment accounts and buying them back into individual savings accounts, taking advantage of the £20,000 annual allowance their spouse receives on top of their own.
Advisers seek to ensure that reconstructed investment portfolios maximise tax relief for the entire family, although this raises questions about control. Holding assets in the name of a spouse or civil partner in a lower income tax bracket can be beneficial – provided there is confidence that they will not spend them.
Fears of future capital gains tax increases are also putting financial pressure on small landlords, prompting many to sell their properties. The 24% capital gains tax is levied on higher-rate taxpayers who sell second homes or rental properties. Larger landlords, who often hold rental properties in corporate structures, are less affected. However, advisers say the potential changes to the capital gains tax could accelerate planned exit strategies and reduce investment levels, neither of which bodes well for a government that is aiming for growth.
Labour insists there are no plans to raise additional taxes. But if any future changes to capital gains tax do occur, tax experts expect them to be implemented without warning to avoid pre-emptive asset disposals. Meanwhile, asset owners who are afraid to sell are filling their coffers, potentially delaying any reckoning.
The evolving role of pensions
The wealthy often view their pensions as a way to pass wealth between generations rather than as a way to spend their own money. Ending the favourable treatment of inheritance tax on defined contribution pensions could be an easy target in any future budget, prompting advisers to consider mitigation strategies.
Pensions have previously been attractive targets for Labour’s Treasury chiefs. But former pensions minister Sir Steve Webb believes that if Rachel Reeves, the new chancellor, has to target pensions, she will do so with “a minimum of cynicism”.
Webb expects to avoid making changes to the tax-free lump sum, introducing higher tax rates or increasing the state pension age – at least in Labour’s first term. However, advisers say clients remain deeply concerned.
For those over 55 who are planning to draw down their pension, getting tax-free cash sooner than expected could seem like a tempting hedge against future rule changes. The maximum total tax-free amount most people can get is £268,275, which is 25 per cent of the historic Lifetime Allowance (LTA).
Anxiety levels rose two weeks before the election when Sir Keir Starmer mistakenly said the Road Transport Agreement would be scrapped in the future.
Financial advisers point out that older clients who plan to make tax-free payments on their money, such as paying off a mortgage or funding a children’s estate, are most keen to withdraw the full amount. However, they urge caution: Withdrawing just a quarter of your pension to reinvest it in a general investment account exposes retirees to the risk of future capital gains tax bills and brings the money into the estate for tax purposes.
Big pensioners were relieved when Labour dropped plans to reintroduce VAT in its election manifesto. Reeves had initially promised to reintroduce it if Labour were elected, but backtracked last month.
“That doesn’t mean it won’t happen in the future,” says Webb, now a partner at LCP, pointing to a general feeling within Labour that pension tax relief is “too biased towards the top”.
Since March, advisers say some clients have opted to take small withdrawals to crystallise their pension benefits, fearing Labour’s reintroduction of the income tax law. “This is because rule changes have historically impacted non-crystallised pensions,” says Adam Walkum, founder of Permanent Wealth Partners.
Reeves’s previous support for a flat-rate pension tax cut has been widely praised, but Webb does not believe she will end the 40% tax cut, especially with an extra three million workers expected to enter that bracket over the next five years. Webb expects Labour’s promised “pensions review” to focus on channelling more institutional investment into British companies.
Currently, workers in the “accumulation phase” can benefit from a £60,000 annual increase in pension contributions while they last. Even if Labour cuts this to £40,000, advisers do not expect any changes before the tax year in April 2025.
With many people already struggling with the effects of the financial downturn, making extra pension contributions to reduce income tax is an effective strategy, particularly for parents earning more than £100,000 who may retain valuable childcare benefits when the system is expanded in September.
Accelerate your legacy strategy
Advisers have long recommended “giving while you live” to reduce inheritance tax bills and start a seven-year countdown to potential exempt transfers. The political shift has added urgency, with some wealthy families rushing to pass on assets to younger generations in fear of changes to inheritance tax under Labour.
“Many families who had already intended to make large gifts to their children or to a trust fund are continuing with their plans,” Ross says.
Advisers fear that any future changes to inheritance tax rules could reduce the benefits of inheriting a pension or remove the exemption from commercial property tax on some AIM-listed shares held for more than two years – a common, if risky, tactic to reduce inheritance tax bills. The IFS estimates that removing these exemptions could generate around £3bn a year.
Oli Saiman, co-founder of wealth management firm Six Degrees, points to a growing interest in taking out insurance to hedge against future inheritance tax liabilities. “If you’re in your 50s or 60s and in good health, a lifetime life insurance policy to provide liquidity to pay the eventual tax bill can be cost-effective,” he says. “A will can only be granted after the inheritance tax bills have been paid, and beneficiaries who inherit a large, illiquid estate with a lot of property or carried interest may find it difficult to do so.”
Mr Saiman also points to a growing interest in creating pensions for children and grandchildren. Up to £2,880 a year can be invested, with a top-up of £3,600 at 20 per cent tax relief, and is not accessible until retirement. “Wealthy families are realising the power of compound interest,” he says.
Family investment companies are also becoming increasingly popular. Family members become shareholders and can be paid dividends. “This can be a very tax-efficient way to cover college expenses for children or grandchildren, who will be subject to a lower tax rate on their earnings,” says Sayman.
Tax-deferred instruments such as offshore bond portfolios are also increasingly being used. These instruments are subject to the beneficiary’s income tax rate, making gifting a tranche of bonds to a college child a popular move. However, be aware of the upfront fees and consulting fees required to set up these structures.
Another simple way to avoid capital gains tax bills on investments is to donate them to charity. Charities can dispose of the stocks tax-free. While they can’t claim gift aid on the value of the donation, individuals can offset the total value of the gift against income tax, which can solve two problems in one.
School Fees – Can Grandparents Come to the Rescue?
Labour’s plans to introduce VAT on private school fees were one of the few tax-raising measures to be held consistently throughout this year’s campaign.
Chancellor Rachel Reeves said no changes to boarding and day schools would be introduced until next year, meaning they would not affect the start of the school year.