Safeguarding your wealth: Strategies to navigate potential labour tax changes

Throughout the general election campaign, Labour officials maintained there were “no plans” to increase taxes beyond their stated manifesto pledges.

However, given the precarious state of the nation’s finances, the wealthy and their advisers anticipate future tax hikes now that the party has assumed control of Number 10.

Labour’s landslide victory was, in part, secured by pledging not to increase income tax, national insurance, VAT, or corporation tax rates — the “big four” taxes which account for about 75 per cent of the annual tax revenue.

This leaves limited flexibility if economic growth falls short of expectations. As a result, speculation about which tax levers might be pulled in the future has been a hot topic among advisers and their clients.

Predicting potential changes to tax rules is fraught with risk. However, higher earners and the wealthy are weighing the risks of pre-emptive action against the potential benefits of lower future tax bills if their strategies succeed.

Aside from relocating abroad, here are four ways the wealthiest are looking to “Labour-proof” their finances against possible future tax increases.

Restructuring your investment portfolio

Advisers suggest that changes to capital gains tax (CGT) could be a subtle way of imposing a wealth tax. Gains on investments held outside pensions and ISAs are currently taxed at 20 per cent: historically low for the UK and relatively low compared to the US and Europe.

Wealth managers report a sell-off has begun as some wealthy clients fear Labour will increase CGT rates, potentially aligning them with rates charged on dividends or income tax.

“We are seeing people taking action and rebasing their portfolios, selling assets now to crystallise gains at 20 per cent in the hope this will protect them from higher future tax rates,” says Katherine Waller, co-founder of Six Degrees, a wealth management firm.

Many of her clients, who are entrepreneurs, have large allowable tax losses to offset gains, making a pre-emptive CGT hit more palatable. Another strategy involves storing up any allowable losses for future use if CGT rates rise, although Waller fears Labour could impose a time limit on these. “It’s also possible that future capital losses will be capped,” she adds.

Christine Ross, client director at Handelsbanken Wealth, notes that her clients are also carefully reshuffling their investment portfolios. “They generally sell [a shareholding] and immediately purchase similar investments to bank the current capital gains tax rate,” she explains. “The shares must be different, as UK tax rules negate this form of planning if the same shares are repurchased within 30 days of sale.”

Investment platforms report that customers are selling shares held within general investment accounts and repurchasing them within ISAs, making use of their spouse’s £20,000 annual allowance alongside their own.

Advisers strive to ensure reconstructed investment portfolios maximise the whole family’s tax allowances, though this raises questions of control. Holding assets in the name of a spouse or civil partner in a lower income tax band can be advantageous — provided there is trust they won’t spend it.

The fear of future CGT increases is also adding to financial pressures on smaller buy-to-let landlords, prompting many to sell up. CGT is charged at 24 per cent for higher-rate taxpayers selling second homes or buy-to-let properties. Larger landlords, who often hold rental properties within corporate structures, are less affected. However, advisers say potential CGT changes could accelerate planned exit strategies and reduce investment levels, neither of which bodes well for a government aiming for growth.

Labour insists there are no plans to raise additional taxes. However, if any future CGT changes do occur, tax experts expect they will be implemented with little warning to avoid mass pre-emptive disposals. Meanwhile, asset owners spooked into selling are swelling the coffers, potentially delaying any reckoning.

The evolving role of pensions

The very wealthy often view 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 in a future Budget, prompting advisers to think of mitigation strategies.

Pensions have previously been attractive targets for Labour chancellors. However, former pensions minister Sir Steve Webb believes that if Rachel Reeves, the new chancellor, has to target pensions, she will do so “with the minimum amount of hissing”.

Webb predicts she will avoid changes to tax-free lump sums, higher rate tax relief, or bringing forward increases to the state pension age — at least in Labour’s first term. Nevertheless, advisers say clients remain deeply concerned.

For over-55s planning to draw on their pensions, taking tax-free cash sooner rather than later might seem a tempting hedge against future rule changes. The maximum tax-free lump sum most people can take is capped at £268,275, equivalent to 25 per cent of the historic pensions lifetime allowance (LTA).

Anxiety levels rose two weeks before the election when Sir Keir Starmer mistakenly said the LTA would be scrapped in the future.

Financial advisers report that older clients with plans for their tax-free cash, such as paying down a mortgage or funding children’s property deposits, are most motivated to take their entire lump sum. However, they urge caution: withdrawing a quarter of a pension only to reinvest it in a general investment account risks future CGT bills and brings money within the estate for tax purposes.

Those with large pensions were relieved when Labour’s manifesto abandoned plans to reinstate the LTA. Scrapped by former chancellor Jeremy Hunt last March, Reeves initially promised to reinstate it if Labour were elected, only to drop it last month.

“That doesn’t mean it won’t happen in the future,” says Webb, now a partner at LCP, noting a general feeling within Labour that pensions tax relief is “too skewed towards the top”.

Since last March, advisers say some clients have opted to withdraw small sums to crystallise their pension benefits, fearing the LTA would be reinstated by Labour. “This is because, historically, changes to the rules have only affected uncrystallised pensions,” explains Adam Walkom, founder of Permanent Wealth Partners.

Much has been made of Reeves’s previous support for a flat rate of pensions tax relief, but Webb does not believe she would end higher rate tax relief of 40 per cent, especially as 3 million more workers are expected to be drawn into this tax band over the next five years. He expects Labour’s promised “pensions review” to focus on directing more institutional investment into British companies.

For now, workers in the “accumulation phase” can take advantage of the increased £60,000 annual allowance on pension contributions while it lasts. Even if Labour reduces this to £40,000, advisers do not anticipate changes before the April 2025 tax year.

With many already battling the effects of fiscal drag, making additional pension contributions to reduce income tax is an efficient strategy, especially for parents earning over £100,000 who could retain valuable childcare benefits when the system expands in September.

Accelerating your inheritance strategy

Advisers have long recommended “giving while living” to reduce inheritance tax bills and start the seven-year clock ticking on potentially exempt transfers. Political change has added urgency, with some wealthy families accelerating asset transfers to younger generations out of fear of changes to IHT under Labour.

“Many families who already intended to make substantial gifts to their children or to a trust are proceeding with their plans,” reports Ross.

Advisers worry that any future IHT rule changes could make it less advantageous to inherit a pension or remove business property relief on certain AIM-listed shares held for more than two years — a common, though risky, tactic to reduce IHT bills. The IFS estimates that removing these reliefs could raise nearly £3bn annually.

Ollie Saiman, co-founder of wealth manager Six Degrees, notes a growing interest in taking out insurance policies to hedge future IHT liabilities. “If you’re in your 50s or 60s and in good health, whole of life cover to provide liquidity for the eventual tax bill can be cost-effective,” he says. “Probate cannot be granted until IHT bills are paid, and beneficiaries inheriting a large, illiquid estate with a lot of property or carried interest may struggle to do so.”

Saiman also reports increased interest in setting up pensions for children and grandchildren. Up to £2,880 per year can be invested, topped up to £3,600 with 20 per cent tax relief, and cannot be accessed until retirement age. “Wealthy families understand the power of compounding,” he says.

Family investment companies are also becoming more popular. Family members become shareholders and can be paid dividends. “This could be a very tax-efficient way of covering university expenses for children or grandchildren, who will be subject to a low tax rate on their dividends,” Saiman adds.

The use of tax deferral vehicles such as offshore bond portfolios is also increasing. These are subject to the income tax rate of the recipient, making gifting a segment to a child at university a popular move. However, consider the upfront charges and advisory fees for setting up these structures.

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. While they cannot claim Gift Aid on the value of the donation, individuals can offset the gross value of the gift against income tax, potentially solving two problems in one.

School fees — grandparents to the rescue?

Labour’s plans to apply VAT to private school fees were one of the few tax-raising measures consistently maintained throughout this year’s campaign.

Chancellor Rachel Reeves has stated that changes will not be introduced for boarding and day schools until next year, meaning they will not affect the beginning of the school

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Safeguarding your wealth: Strategies to navigate potential labour tax changes