How are investors likely to be affected by the new Labour government under Sir Keir Starmer?
After all, they didn’t give much away during the General Election campaign.
As wealth manager AFH notes: “Investors have traditionally been wary of Labour governments, but, the party under Starmer has shifted to the centre ground.
“The UK equity market has tended to fare better under Conservative governments. Since 1983, the FTSE All-Share index has delivered an average annual gain of 4.9% under Conservative governments, compared with 3.9% under Labour.”
The big question is how the money can be raised for the Party’s spending ambitions.
However, at least there is someone with a track record in charge – Rachel Reeves.
She studied at the London School of Economics before working at the Bank of England and then HBOS.
Wikipedia assessed her Shadow Chancellor performance as adhering to modern supply-side economics, focussing on infrastructure, education and labour supply by rejecting tax cuts and deregulation. “It is heavily inspired by Joe Biden’s economic policy. She coined the term ‘securonomics’ in 2023 to refer to her version of this economic policy.”
She has been endorsed by former Bank of England Governor Mark Carney who said it was “beyond time” her plans were put “into action”.
Labour has committed not to increase National Insurance Contributions or VAT, the basic, higher or additional rates of income tax or the main rate of corporation tax. It is pledged to generate economic growth.
Morning Star comments: “Labour will be keen not to dismantle too much of the current savings and investing regime too quickly.”
Yet Reeves has to find extra money from somewhere.
One idea is introducing a flat rate of tax relief on pension contributions. Why should higher earners, the argument goes, get a bigger Government subsidy on pension savings than lower earners? A flat rate for everybody (25-30%) would likely be seen as equitable.
The annual allowance for paying into a pension without incurring tax is £60,000 but this was increased from £40,000 as recently as April 2023. Might it revert?
Capital Gains Tax and Inheritance Tax could come into play, with a much tighter assets regime around the death of a business owner.
Use of different investment wrappers (pension funds, ISAs, Investment Bonds, direct holdings) will need plenty of work to be as efficient as possible.
Another way to indirectly tax wealth is to increase dividend tax rates or reduce the current £1,000 tax-free allowance on dividends.
Rathbones thinks the ISA system could be shaken up, perhaps capping ISA savings at £100,000 or making ISAs UK-only investment vehicles
The firm suggests: “It could make sense to adjust your investment portfolio to reduce dividend-paying stocks in favour of those that reinvest in themselves or buy back stock.”
Of capital gains tax, it adds: “You can crystallise losses before the change, maximising your allowance. Also, you can use losses from prior years to reduce your liability. You have up to four tax years to report a loss to HMRC. You can also defer CGT by investing in the Enterprise Investment Scheme.”
There will be winners and losers too amongst share portfolios.
House builders should do well out of the “biggest boost to affordable housing for a generation”.
Companies operating in renewable energy could also benefit under Labour. Conversely, the conventional energy sector is expected to face headwinds with an expansion of the current windfall tax on oil and gas companies. There are concerns that the banks could become a target with speculation that the Government might oversee a reduction in the interest paid on commercial banks’ deposits held with the Bank of England.