The Labour party’s recent landslide victory has sparked considerable concern among the wealthy about potential future tax hikes. As Labour has now taken control of Number 10, speculations about changes to tax rules have dominated conversations with financial advisers. Despite Labour’s assurances, the rich are preparing for potential increases in various taxes.
Therefore, the wealthy are seeking ways to safeguard their assets. Advisors are suggesting various strategies to help their clients ‘Labour-proof’ their finances. These include restructuring investment portfolios, rethinking pensions for wealth transfer, accelerating inheritance plans, utilising family investment companies, and considering grandparents’ contributions to school fees.
Restructuring Your Investment Portfolio
Advisers suggest that changes to capital gains tax (CGT) could be a subtle way of imposing a wealth tax. Currently, gains on investments held outside pensions and ISAs are taxed at 20 per cent, which is historically low for the UK and relatively low compared to the US and Europe. Many wealthy clients fear Labour will increase CGT rates, aligning them with rates charged on dividends or income tax.
Wealth managers report a sell-off has begun. Some wealthy clients aim to crystallise gains at the current 20 per cent rate to protect themselves from higher future tax rates. Katherine Waller, co-founder of a wealth management firm, says her clients are selling assets now to achieve this. Entrepreneurs, in particular, with large allowable tax losses, find a pre-emptive CGT hit more manageable.
Investment platforms have noticed customers selling shares in general investment accounts and repurchasing them within ISAs. This approach uses their £20,000 annual allowance efficiently, along with their spouse’s allowance. Maximising family tax allowances becomes crucial. However, holding assets in a spouse or civil partner’s name can raise control issues.
The Evolving Role of Pensions
The wealthy often see their pensions as vehicles for intergenerational wealth transfer rather than for their own spending. Ending the favourable inheritance tax (IHT) treatment of defined contribution pensions could be an easy target for future budgets. This is prompting advisers to devise mitigation strategies.
Former pensions minister Sir Steve Webb believes that if Labour targets pensions, changes would be minimal. He predicts there won’t be changes to tax-free lump sums, higher rate tax relief, or bringing forward state pension age increases in Labour’s first term. Advisers say clients remain concerned and may take tax-free cash sooner to hedge against future rule changes.
The maximum tax-free lump sum is capped at £268,275. Some financial advisers report increased client interest in taking their entire lump sum. However, there’s caution against withdrawing a quarter of a pension only to reinvest it in a general investment account, exposing it to future CGT bills and estate taxes.
Accelerating Your Inheritance Strategy
Advisers recommend “giving while living” to reduce inheritance tax bills. Political changes have added urgency, with wealthy families accelerating asset transfers to younger generations out of fear of changes to IHT under Labour.
Any future IHT rule changes may make it less favourable to inherit a pension or remove business property relief on certain AIM-listed shares held for more than two years. This move could raise nearly £3bn annually, according to the IFS. Advisers worry about the impact these changes could have.
There is growing interest in taking out insurance policies to hedge future IHT liabilities. For those in their 50s or 60s in good health, whole-life cover can be a cost-effective solution. This would provide liquidity for the eventual tax bill, which is necessary before probate can be granted.
Using Family Investment Companies
Family investment companies are becoming more popular. Family members become shareholders and can be paid dividends. This method is very tax-efficient and can cover university expenses for children or grandchildren, who will be subject to a lower tax rate on their dividends.
The use of tax deferral vehicles such as offshore bond portfolios is also increasing. These are subject to the recipient’s income tax rate, making gifting a segment to a child at university a popular move. However, there are upfront charges and advisory fees to consider.
Another simple way to avoid CGT bills on investments is to donate them to charity. Charities can dispose of shares free of capital gains tax, and individuals can offset the gross value of the gift against income tax. This solution helps solve two financial problems at once.
School Fees: Grandparents to the Rescue?
Labour’s plans to apply VAT to private school fees have remained consistent. However, changes won’t be introduced until the next school year. This gives grandparents a chance to help cover private school fees in a tax-efficient manner.
Grandparents can make use of the £3,000 annual gift allowance per grandchild. Although these small amounts may not cover full school fees, over time, they can significantly reduce the financial burden.
With the Labour party’s proposed tax changes, it’s vital for individuals to proactively manage their wealth. Strategies like restructuring investment portfolios, rethinking pension use, and accelerating inheritance plans are key. Utilising family investment companies and allowing grandparents to help with school fees can make a significant difference in a family’s financial planning. Taking these steps now can help secure financial stability for the future.