What would a Corbyn-led Labour Government Mean for Tax-Advantaged Investing?
This was not even a question that was taken seriously until the election debacle of 2017. It could be argued that Labour’s Election Manifesto was not properly costed by independent economic analysts because the election seemed a foregone conclusion, with the Conservatives seemingly about to coast to victory with a 20% opinion poll lead over Labour. We all know what happened next – the Tories scraped through the election with a narrow minority government (supported by the DUP), and the previously perilous position of Jeremy Corbyn was transformed into a position of strength, silencing the most audible criticism of his leadership within the Labour party.
With the Conservative party tearing themselves apart over Brexit (plus ça change) and the polls finely balanced, it is no surprise that the Shadow Chancellor, John McDonnell is doing his own version of the ‘prawn cocktail’ PR assault on the CBI and the City and is getting a surprisingly positive welcome. The surprise is that such august organisations would be willing to entertain the election of Corbyn and McDonnell, because these people and the people they surround themselves with are unabashed Marxists and have never deviated from this creed since the 1960s. We can probably assume that the far Left of the Labour party is not being courted by the City/CBI milieu because of a newfound affinity and affection for Marxist economics, but because of one very special ingredient – they may just constitute the next government.
It would be wise to assume that a Labour win at the next general election would not immediately result in policies that would overjoy the Marxists in the party. Thatcher’s election did not immediately result in the top rate of personal income tax being halved, in privatisations immediately happening, and her move to solidify the Single Market Act of 1985. In the same vein, neither do I expect Corbyn/McDonnell to immediately dispense with the private sector in the United Kingdom. The first Budget would probably increase corporate taxes by some 50% but it would be argued that this was the same rate as when Tony Blair was in power, so how could that be characterised as extremist? Nationalisations would be an immediate priority and much of the populace would view railway nationalisation, for example, as a pragmatic move. Monetary financing (i.e. goodbye to Central Bank independence) would also be seen as a welcome and novel approach to ending so-called austerity.
However, the impact on the tax-efficient savings market will almost certainly be a major focus of the first budget, simply because the populist appeal of the measures would be red meat to the far-Left supporters who have dreamt of punishing the ‘rich’ for as long as they can remember. One simply has to dismiss economic analysts who argue that this would have negative welfare effects on the economy because that is beside the point. There would be a theological impulse emanating from a Corbyn/McDonnell government that would see ‘soaking the rich’ as an expedient and desirable goal, with only policy wonks left to worry about the impact on capital formation in the broader economy.
Anyone who doubts the last statement should probably read the recent FT article, Ten ways to safeguard your savings income (March 9, 2018). The article quotes a well-respected accountant, who is positively espousing his view on ensuring that HNW individuals pay very little tax with the right tax planning. “Remarkably, he calculates that it would be possible for a couple to have an income of £120,000 a year and pay less tax than someone earning the average wage…” simply through the intelligent application of the appropriate tax-efficient vehicles.
This is precisely the ‘red meat’ a Corbyn government would feed upon, and it is our considered opinion that most tax-advantaged investments would either be eliminated or severely curtailed. Here is our list of the impact on the most popular tax-efficient investment vehicles and how they might be affected:
Individual Savings Account (ISA) – investors can shelter up to £20,000 per year in this savings vehicle, although there is no tax relief at source. There is no tax on income and capital gains, allowing investors to shelter their investment from the taxman.
Symvan view - This will almost certainly either be eliminated or sharply curtailed by Labour because it clearly targets the upper middle class who can afford to set aside £20,000 per year after their pension contributions. If it was to be eliminated, it would probably be phased out during the first Labour term in office and subsequently eliminated in the second term (shades of Thatcher on income tax).
Capital Gains Tax – this is a tax on the disposal of one’s possessions, meaning investments such as property, shares or investment funds to name just a few examples. There is currently a top rate of 20% (but higher for property) for higher rate taxpayers and 10% for basic rate taxpayers and these have come down considerably over the past 20 years.
Symvan view - This tax will almost certainly be increased immediately after the first Budget. Punitive taxation on capital gains is as close to Marxist orthodoxy as one gets. Expect at least a doubling of this rate.
Pension Contributions – the fulcrum of the class war, and a deservedly popular tax relief for investors. Basic rate taxpayers receive a 20% pension tax relief on their investment, whilst additional-rate taxpayers receive 45% pension tax relief. If you are a basic-rate taxpayer and were to contribute £100 from your salary into your pension, it would only cost you £80. The government adds an extra £20 on top – what it would have taken in tax from £100 of your salary. Additional-rate (45%) taxpayers only need to pay £55 respectively to achieve the same £100 of pension savings.
Symvan view – there will be an immediate move towards all pension contributions being achieved at the basic rate of 20% on the tax-relief fund, and do not be surprised if there is a £10,000 limit on the annual contribution. Alternatively, Labour might just eliminate this tax wheeze altogether and put the tax savings (from the elimination of tax relief) into the state pension.
VCT and EIS - both schemes are designed to increase private individual investment into UK growth companies and foster entrepreneurial enterprises so that they may create valuable employment and form the backbone of a UK industrial strategy. There is 30% tax relief on investments and very favourable IHT and CGT tax treatment.
Symvan view – this is obviously an area close to our heart as we are an EIS fund manager. It is difficult to see what a Labour government might do in this sector. On one hand, this asset class can be depicted as tax breaks for rich people, but the move by the government to eliminate the ‘asset-backed’ section of the market has dented this argument at least somewhat. On the other hand, even a doctrinaire Marxist government would surely not wish to eliminate investment into UK growth companies even if ‘rich’ people were receiving tax breaks.
I suppose the ambiguity on EIS/VCT investing was highlighted in a recent public discussion featuring John McDonnell when he was explicitly asked a question on the future of tax-efficient investing by Gervais Williams, a well-respected SME fund manager at Miton Asset Management. Williams questioned the Shadow Chancellor as to whether EIS & SEIS would be eliminated by an incoming Labour government, to which McDonnell responded – “not necessarily”
As the White Queen once noted, “… sometimes I’ve believed as many as six impossible things before breakfast.”