As predicted by the polls, the UK today has a new Labour government led by Keir Starmer with more than 400 seats in parliament, giving it a significant majority of around 170 seats.
The Conservatives as fully expected suffered heavy losses, while the Liberal Democrats achieved their best result since 1923. At the eighth time of asking, Nigel Farage the Reform UK leader won a parliamentary seat.
Matt Evans, portfolio manager, UK sustainable equities, Ninety One, said: “While Labour has a huge parliamentary majority, it is perhaps not the political landside it appears. Indications are that they have taken just 36% of the vote, with a large number of seats won on a slim margin.
“Therefore, as they progress through their term, the UK’s economic challenges of planning reform, EU alignment, tax reform and public sector productivity will not easily be solved and will depend on potentially controversial trade-offs. Despite this, the ‘Securonomics’ Labour is going for should support stability in the shorter term. Monitoring policy implementation and improving growth will be key to retaining confidence.”
With the focus now shifting to the party’s immediate fiscal agenda, as Rachael Griffin, tax and financial planning expert at Quilter outlined: “The prevailing sentiment from Labour’s campaign was one of moderation – the ethos was ‘expect the expected’. Labour pledged not to raise the primary revenue-generating taxes – namely income tax, VAT, national insurance, and corporation tax.
“But with a mandate for change, the new government is well-positioned to implement significant reforms.
“The projected revenues from Labour’s proposed measures (such as VAT on private school fees, removal of non-domicile status and windfall taxes) have been deemed by the IFS as “insignificant to negligible.”
“This has led to speculation about how the Labour government plans to finance the anticipated upsurge in public expenditure, without resorting to further tax hikes or exceeding the borrowing limits set by the fiscal rules that Rachel Reeves has committed the party to.
“Labour has been prompt in dismissing any insinuations by the Conservative Party regarding potential tax increases, suggesting limited immediate alternatives. It seems Labour is banking on their progressive supply-side economic policy to spur enough growth to create fiscal leeway for increased spending in the latter part of their term.”
Tony Smith, head of tax, technical & advice delivery – Asia & Middle East, and Angelina Lai, chief investment officer – Asia & Middle East, St. James’s Place highlighted their key takeaways in a briefing note, including:
• Labour has announced plans to charge inheritance tax on all non-UK assets held on trust, a move that could result in significantly higher tax bills. With the expected move to a residence-based regime for inheritance tax purposes, individuals who will immediately become subject to UK IHT on their worldwide assets, or those who will likely come within scope, will need to consider how their assets are structured and whether alternatives offer greater efficiencies.
• Individuals able to move jurisdictions should examine their long-term plans and consider the impact of the changes. It is likely that the individuals most affected and free to move will consider other jurisdictions offering a more favourable tax outcome, together with a lifestyle that meets their requirements.
• The United Arab Emirates (UAE), particularly Dubai and Abu Dhabi, will likely see an increased number of people entering the region and making it their long-term base. Already, the UAE is one of the top expat destinations for UK residents, due to its political stability, international connectivity, favourable visa and tax policies and high quality of life.
• Our analysis of UK market performance data spanning the past 10 UK elections from 1987 found no clear trends between election outcome and market performance, underscoring the importance of staying invested and not trying to time the market in response to short-term events
Holly Payling, partner in the expatriate tax services team at the accountancy firm Buzzacott said: “The Labour government’s headline proposal marks a pivotal shift for non-doms from the long-standing remittance basis of taxation towards a residence-based regime. It will be available for both UK domiciled and those who are non-domiciled alike. This is a huge cultural shift from the current rules, which have remained in place for non-doms for many decades.
“The central questions revolve around whether a Labour government will echo proposals from the Conservative party which were due to take effect from April 2025 or look to something very different. The Conservative government did not implement its non-dom proposals in the 2024 Finance Bill, so the jury remains out.
“Labour have indicated that it will tighten the transitional rules allowing tax incentives for bringing previously untaxed offshore funds onshore, but have also suggested it will include incentives to encourage investment of offshore funds into the UK as part of its new four-year residency regime.
“Perhaps the most significant proposal is that trusts created by non-doms may no longer shelter offshore assets from inheritance tax, irrespective of when those trusts were created. It will likely result in increased scrutiny of offshore trust vehicles.
“It is widely anticipated that the Labour government will launch a consultation on proposed changes seeking the input from the advisory community, but for the moment, wealthy expatriate families should take advice. We will continue to review clients effected by the proposed changes and advise accordingly.”
Yazmin Boden, partner of GSB Wealth, said: “In terms of investment strategies, we can expect sectors related to clean energy and infrastructure to experience a boost based on Labour’s pledged policies in these areas. Other key sectors likely to benefit include banking, construction, and retail.
“Labour’s pro-growth funding strategy is likely to provide a favourable environment for medium-sized companies listed on the FTSE 250 index. The creation of a national wealth fund and support for key sectors like financial services and automotive should stimulate business investment.
“The anticipated stability of a Labour government – following a merry-go-round period of Conservative prime ministerial changes in such quick succession – is likely to be warmly welcomed by the Markets, its centrist platform having a net positive effect on financial markets, and we could see a stock market uptick going into Q3.”
She continued: “The tax-position of non-doms remains up in the air, which will cause concern and make tax and wealth planning more challenging until clarity prevails.
“As a wealth manager with clients who have assets and interests across multiple jurisdictions, we urge the newly formed government to provide clarity on non-dom status as a matter of urgency.”
“The proposed changes to the Nom Dom taxation space will likely present a knock-on effect amendment to the IHT regime for UK domiciled individuals living outside the UK.
“With the potential transition of a domicile based inheritance tax regime to a residency based system, those who have lived outside of the UK for 10+ years could be clear of the 40% tax charge upon their estate at death.
“Of course, UK situ assets would still be trapped within the UK Inheritance Tax regime, but otherwise, this could represent a significant loophole and subsequent tax saving for non-resident Brits.
“At GSB, conversations with non-resident British clients have turned keenly to the proposed changes. The motivation now being to remain outside of the UK for retirement and sell / reduce their UK domicile asset base significantly, or at least to below £1,000,000 (which represents the combined maximum inheritance tax allowance for married couples at present).
“Our view is that the proposed changes to the Resident Non-Dom regime and the subsequent IHT consequences was pretty shortsighted of both the Tory and Labour party.
“The change was clearly politically fuelled and fails to appreciate the long-term economic and fiscal consequences of discouraging wealth individuals from living in the UK. Of course, the IHT consultation has however been paused, we are unlikely to see any material updates before Q4 2024.”
Nigel Green CEO of deVere Group said: “Markets like certainty and so Labour winning decisively will be welcomed as this removes some of the uncertainty.
“This boost is likely to be limited, however, as the markets have already largely priced-in the expectation.”
For UK equities to maintain a positive trajectory, there are three critical factors, he said.
“First, the new government must prioritize and deliver on economic growth. The Labour Party’s pledge to target an annual growth rate of at least 2.5% is a promising start, but achieving this will require concrete plans and effective execution.
“Second, maintaining fiscal discipline is essential. The government must avoid excessive spending that could widen the fiscal deficit or necessitate higher taxes, which could stifle economic growth. A balanced approach to fiscal policy will be crucial in sustaining investor confidence.
“And third, lower interest rates by the Bank of England (BoE). A looser monetary policy, characterized by lower interest rates, would be beneficial for stimulating economic activity. The Bank of England’s cooperation in making borrowing cheaper and more accessible will support stock prices and overall economic health.”
Gary Smith, partner in financial planning at wealth management firm Evelyn Partners, said: “Labour’s majority gives the new Government great executive power even if the proportion of the vote at 34 per cent indicates a less emphatic popular mandate. Even with this Parliamentary stronghold, it’s still unlikely that the new Government will spring any policy surprises early in its office.
“But the super-majority could at some point open policy doors that otherwise would remain closed. After all, Starmer’s Government would have to antagonize a huge number of the voters it has gained to hand back the 90 seats or more that would be required to lose its majority at the next election.
“So it’s possible that, further into the Parliament, the Government will feel it has the leeway to implement a bolder agenda.”
The Labour Party’s manifesto included the following finance-related pledges:
• The removal of private school fees from VAT exemption
• A crackdown on tax avoidance and loopholes, including abolishing the non-dom status
• The status quo on the state pension triple lock
• Not to raise income tax, National Insurance, VAT or the headline rate of corporation tax
Smith said: ‘The manifesto provided little detail on these measures and we might not find out the small print until an Autumn Budget which is expected in September, and even that will probably not clarify everything, like pensions policy for instance. We may instead see a number of reviews launched.
‘That aside, leading Labour figures have been keen to stress there are no tax-raising plans being nurtured in back rooms and it is only fair to take them at their word. But given the tendency for Government spending to overshoot and black holes to open up in the public finances, it’s inevitable that people are wondering how a Labour government might look to raise money without the biggest tax levers at its disposal.”
Smith added: “It’s unlikely the new Government will introduce any controversial new measures straight away, as Mr Starmer will be accused of sleight of hand. It is the middle years of the Parliament when Labour could push the policy boat out, as there’ll be time before the next election for the ripples to subside.
“Capital gains tax, inheritance tax and the tax-preferential treatment of pension saving have all featured in speculation around possible targets for a Government that needs to raise revenues down the line.”
Here Gary Smith looks at what we do and don’t know about Labour’s policy intentions – and what savers and investors might be faced with in the years ahead.
WHAT WE KNOW
VAT levied on private schools
The manifesto shows the party expects to raise £1.6bn from applying VAT and business rates to private schools, and Rachel Reeves has said this policy won’t be introduced ‘until 2025’.
Smith said: “Most private schools, facing pressure from rising wage and pension costs, will not be able to absorb the imposition of VAT at 20 per cent, so fees payable by parents will soar. That in turn will take a private education ever further out of the equation for many middle-class families, even where earnings are high.
“Even before the prospect of VAT being imposed emerged, rising school fees have been causing many parents to think twice about sending their children to private school. Fees for the 2023/2024 academic year increased by 8.0 per cent on average from the previous year.
“A 20 per cent hike would be a final deal-breaker for many thousands of families. A recent survey suggested that as many as 42 per cent of the total number of children currently in fee-paying places could be taken out of their schools and into the state system over the next five years.
“Many private schools have been offering pay-in-advance schemes, which have always existed for parents looking to save on inflationary increases by paying for subsequent years up front, in the hope that this could avoid VAT. However, it is possible the VAT rules could be amended to prevent this, by making the VAT applicable when the service is delivered rather than invoiced – and even parents who signed up to payment plans could be faced with extra bills.
“The devil will be in the detail.”
Tax avoidance crackdown and closing of ‘tax loopholes’
Labour expects to raise £5.2bn from closing the non-dom tax status, investment in reducing tax avoidance and £565m from closing the ‘carried interest loophole’ in the private equity sector.
Smith said: “In part this is about changing tax rules to close “loopholes” and in part about beefing up HMRC resources to investigate claims and crack down on evasion. But it will be no surprise if it is accompanied by some sort of review into how tax reliefs are being used by savers, investors and households passing on wealth in order to mitigate tax.
“One person’s “loophole” is another’s “legitimate tax relief” and when a Government is in need of money, it’s tempting to start portraying the latter as the former. Labour has already suggested in the recent past that it regards some of the reliefs available from inheritance tax are too generous, particularly business and agricultural property reliefs.”
The pensions Lifetime Allowance
Labour appears to have dropped its intention to resurrect the pensions Lifetime Allowance, which was not mentioned in the manifesto.
Smith said: “Labour’s threat to reinstate the LTA had been causing a lot of uncertainty, putting some savers’ plans into paralysis, and raising the spectre of yet more stultifying legislation.
“The implementation of the LTA’s abolition has been imperfect and sometimes confusing, and financial planners are still wrestling with LTA hangovers like the Lump Sum allowance and the question of death benefits – but broadly speaking the LTA was an unwelcome distortion and best consigned to history.
“The question is of course whether a new Government will look to limit the cost of pension tax relief to the Treasury in some other way.
‘Above all, the majority of savers, retirees and their advisers would now welcome a period of certainty and stability when it comes to the taxation and rules for private pensions – and pension saving in the UK would certainly benefit from that too.”
State pension triple lock – and state pension age
Smith said: “Labour have pledged to retain the triple lock but stopped short of matching the Conservatives’ ambitious “triple lock-plus”, which would have raised the personal income tax allowance for pensioners so that no one paid income tax on the state pension as it rises in the years to come.
“This does mean that the state pension – at its current full rate of £11,502 a year – will remain on a collision course with the personal allowance, the amount of income which can be earned tax-free each year. That is currently frozen at £12,570 until 2028, a timeline Labour has said it will stick to.
“This raises the prospect that pensioners will soon be taxed on their state pension income, and the OBR has forecast that the state pension will overtake the personal allowance level by 2027. But if inflation or wage growth gives an unexpected boost to the state pension, this could happen sooner.
‘That would present the Government with a major policy quandary, possibly on the eve of the next general election shining a harsh light both on the affordability of the triple lock and on the stealth tax rises effected by the long-term freeze in personal tax thresholds.
“Another policy quandary that has been kicked into the long grass recently and will continue to cause the authorities difficulties for many years is the state pension age, and specifically the rate at which it should rise to keep the payout sustainable. This is obviously inextricably linked with the triple lock, which is making the state pension rapidly more expensive for the Treasury.
“It would be brave for a new government to grasp this nettle, as the fiscal benefits will not be felt for years or decades down the line. With the generally younger profile of Labour’s support, it might be felt that a new consultation on bringing forward state pension age increases would play well, and it may well do as the growing expense of the state pension is sometimes brandished in the generational fairness debate.
“Ironically of course, it is today’s younger and middle-aged cohorts who will face a longer wait for their state pension when they enter their sixties if there is an agreement shortly to accelerate planned increases in the SPA.
“One favour today’s workers can do for themselves is to assume the triple lock might not be sustainable for more than a decade, and that they need to save more than they think to make up for that.”
WHAT WE DON’T KNOW
Smith said: “The Tory manifesto contained a pledge to “not introduce any new taxes on pensions” and also not to increase capital gains tax. The Labour document did not but promised “a renewed focus on tax avoidance by large businesses and the wealthy will begin to close the tax gap and ensure everyone pays their fair share”.
“This has already driven speculation about potential Labour tax targets, which will only be partially dampened if such measures are absent from the first Labour fiscal statement that will probably be held in September.
“It’s possible, particularly further on into the parliament, that the Government could be faced with bridging a funding gap that seems bound to open up even if public sector spending is severely restricted. And that might shine a spotlight on CGT rates, the tax treatment of pensions or certain IHT reliefs.
“Savers, however, should be very wary of acting on such possibilities and it is highly unlikely any changes to the tax system would be enacted before April 2025.”
Capital gains tax
Smith said: “Within Labour there are advocates for raising capital gains tax, and even aligning it with income tax rates, but the leadership have said there no plans to do so. Any future move in that direction would in any case be kept top secret, with little notice given before new rates came into force – because the prospect of higher CGT rates will see many investors dispose of assets in mitigation.
“Arguments that investors benefit from lower rates of capital gains tax than those who pay income tax on earnings miss a crucial point: investing is different to having a paid job. It involves deploying capital and taking risks, and that has historically been the rationale behind lower rates of CGT than income tax.
“Higher CGT rates – on top of the recent shrinking of the annual CGT allowance – tend to distort, and in some cases deter, investment as investors either hold onto unprofitable assets, or dispose of profitable ones, in response to changing rates of taxation. There is also evidence to show that higher CGT rates would reduce the amount taken in revenues in the short to medium term, rather than being a positive for the Treasury.”
“This is probably the one area of uncertainty where we have had most enquiries from clients, and some who are most concerned about a possible CGT hike have been looking to dispose of assets – although in most cases this is bringing forward disposals that were already on the cards in the next year or two.”
Pension tax relief
The Conservatives affirmed that they would not introduce any new taxes on pensions or increase existing ones for the whole of the next Parliament.
Smith said: “We have no indication of any such plans from Labour but no assurances to the contrary either. In spite or possibly because of the absence of any plan to reintroduce the Lifetime Allowance, the tax-preferential treatment of pensions is inevitably drawing some speculation – not least because even recent Conservative governments have cast an eye on higher rates of tax relief on contributions.
“Labour objected to Jeremy Hunt’s pension taxation reforms at the 2023 Budget (when the LTA abolition was announced) as “a tax gift to the wealthy”, so the increase of the annual allowance from £40,000 to £60,000 cannot be considered untouchable. The annual allowance is arguably an easier and more efficient way to cap the amount spent on pension tax relief than the LTA, so some sort of reversal of the AA increase is not unthinkable.
“Another way to limit the Treasury spend on pension tax benefits would be to reduce or do away with the 25 per cent pension commencement lump sum, or to cut higher rates of tax relief on pension contributions. Either measure would be controversial, and the latter would be an administrative challenge, so they are perhaps unlikely, at least early on in a new government’s parliament.
“Pension contributions are an effective way for earners to pay less income tax as the personal allowance and thresholds remain frozen, so while data is not yet available it could be that the spend on tax relief has increased substantially in the last year or two.
“One final tax-preferential treatment of pensions that could come under scrutiny is the exemption of defined contribution pension pots from inheritance tax.”
Inheritance tax exemptions
Smith said: ‘The sole mention of inheritance in Labour’s manifesto was that regarding the use of offshore trusts for non-doms – and the Tory manifesto did not include one instance of the word inheritance, although it did pledge to retain business and agricultural property reliefs.
“However, Labour have previously made it clear they think some inheritance tax exemptions and allowances are too generous, so it’s possible some sort of measures will be taken to reduce them if they gain power.
“While the IHT-exempt status of defined contribution (or money purchase) pension pots has not been mentioned by Labour, it has been highlighted more than once by think-tanks as an anomaly, so it might well be on Rachel Reeves’ radar.
“If some steps were taken to levy IHT on the transfer of pension assets, this would probably lead to a widespread draining of drawdown pots, and a lurch towards other assets and tactics that mitigate against IHT, which at 40% is quite significant.
“The other major talking point on IHT is around business and agricultural property reliefs, with one think-tank recently highlighting how they help some large estates shelter assets from IHT, and questioning the potential eligibility of many AIM shares for business relief.
“There are legitimate reasons behind business and agricultural IHT reliefs, which help family and rural businesses to remain intact and going concerns on the death of owner, thereby savings jobs and assets of community value. Even criticism that focuses on the use of business relief to protect AIM shares holdings must take into account that it’s there to encourage private investment in small British firms – something that is sadly in short supply in the UK economy at the moment.”
Workplace pensions
The Labour manifesto said: ‘We will also adopt reforms to workplace pensions to deliver better outcomes for UK savers and pensioners. Our pensions review will consider what further steps are needed to improve security in retirement, as well as to increase productive investment in the UK economy.’
Smith said: “There has been a lot of noise in recent years around workplace pension reform, measures to help savers manage multiple pots, and extending auto-enrolment. While the lights faded over the years on the pensions dashboard project, the Government floated other pension-industry solutions to the issue of people accumulating a number of sometimes small workplace pots through their working life.
“We’ve had “pot follows member” versus “default consolidator”, and most recently “pot for life”. It’s probably wise for savers not to wait around for that or the pensions dashboard or whatever the new Government announces before they get a grip on their pensions.
“Pot for life would require structural reforms to the pensions sector and to occupational schemes, and if dashboards are anything to go by, don’t hold your breath. Better to get a grip on your savings if they spread far and wide, consider some sort of consolidation, and if large sums are involved look at taking advice.
“As the cogs of policy grind slowly round, savers of all ages can give their retirement some serious thought. Typically, savers make two big mistakes: they underestimate how long they will live and they underestimate or give no thought to what they need to save to support the lifestyle they want in retirement.
“The closer you get to downing tools and leaving work, the harsher these realities become, and if your pension savings are disorganised and neglected, the tougher it will be to stop working and enjoy the sort of comfortable retirement you’d envisaged.”
