Financial planning in a changing landscape: The UK General Election 4 July

In a nutshell

When? Polling on 4 July

Why? Prime Minister Rishi Sunak said he had reached the two “major milestones” of reducing inflation and growing the economy. As the UK emerges from a cost-of-living crisis, he believes his party (Conservatives) can deliver stability going forward. While he was largely expected to announce a general election in the autumn, he believes the element of surprise of an early election might work in his favour.

What do the polls say? The Conservative Party, which has been in power since 2010, is significantly behind the Labour Party in the polls.

What we know

Whichever party wins the general election on 4 July to form the next government will have to build a robust, sustainable plan that ensures it meets its fiscal targets. It can only do so by cutting spending and/or raising taxes.

• Tax on pensions: Conservatives have said they would not introduce new taxes on pensions or increase existing ones in the course of the next Parliament. This means there would be no change to the 25% tax-free lump sum and tax relief on pension contributions at the marginal rate of income tax. In its manifesto, the Labour Party promised a review of the pensions landscape to ensure improved pension outcomes and greater investment in the UK markets.
• Lifetime Allowance (LTA): The Conservative government recently abolished the LTA, previously capped at £1,073,100. When the LTA abolition was introduced, the Labour Party said it would bring back the cap. Labour reversed its decision due to the uncertainty it would cause savers ahead of the election – but refused to mention if it would introduce any changes during a Labour-led government mandate.
• Inheritance tax: Labour has said before that it believes that some inheritance tax exemptions and allowances are too generous, which means there could be some changes to this tax in the wake of a Labour-led government. In addition, a recent report from the Resolution Foundation (a Labour policy think tank) concluded that “the problems with the IHT suggest that an ideal approach would be to reform rather than abolish the tax, with reforms focused on tightening reliefs”.¹
  Inheritance tax could be high on the list of areas to revisit in case of a Labour win. The nil rate band – the figure at which an estate is tax-exempt – has remained at £325,000 for many years, while the number of estates getting over that threshold continues to rise.
• Individual Savings Accounts (ISAs): UK residents are entitled to save £20,000 in an ISA, free of income tax and capital gains tax every tax year.
  The Resolution Foundation has several times made the case for capping the ISA allowance at £100,000 – meaning individuals would pay taxes on ISA savings above that threshold. This suggests there is a chance a Labour government could look at the effects of adding a ceiling to the ISA tax allowances down the line. The Labour manifesto left out any information about a reform in the ISA landscape.
• A British ISA? Earlier this year, the Conservative government announced the launch of a British ISA, to be launched later this year. A British ISA would provide individuals with £5,000 of savings free of tax, in addition to a standard ISA (capped at £20,000 per tax year). A government formed by the Labour Party could scrap the British ISA.
• Capital gains tax (CGT): This tax-free allowance was reduced by half to £3,000 in the tax year 2024-25, so realistically a new government might not find much room for manoeuvre in this area. And indeed, in case of a Labour victory, this party has said it would not change this allowance. The Labour manifesto did not confirm any CGT changes, but there are ways in which the Labour Party could target individuals in the higher earning brackets.
• Private school fees: One of the few solid commitments the Labour Party has made ahead of publishing its manifesto – which its publication indeed confirmed – is its intention to charge VAT on private school fees. It expects to take £1.5bn from applying VAT and business rates to private schools.

What does this mean for the UK economy and investments?

Very few events in UK politics, including general elections, have meaningfully moved markets. From an investment markets standpoint, it matters little who wins.

* We are producing a separate article covering this topic and sharing our historical analysis adjacently to this article.

The number of elections across the world has reached a record high in 2024. And while in some countries it is challenging to predict results, in the UK the possible results are seen as safe and predictable – and investors like that. In fact, the political turmoil in Europe of recent weeks contrasts with the stability on offer in this year’s UK election.

Whichever party forms a government next will not be in a position to offer something radical, as it can’t afford the risk of upsetting its supporters. Therefore, there is very little reason to believe that the 2024 general election could affect the financial markets on the downside.

How to prepare for potential changes

A newly formed government will not wait long to start looking for ways to increase taxes and reduce spending, and that could be done in several ways. The Labour Party has not tried to hide that it could look for increased revenues through the targeting of individuals on wealthier brackets, which means there is large potential for changes in capital gains tax and inheritance tax.

• Use your allowances: Make sure you do not miss out on any of the available allowances. A new government could apply changes to the current landscape, so it is important to ensure you are leveraging your allowances before and after any changes are made to government.
• Plan to adjust to different circumstances: A possible new government could alleviate or burden different parts of an individual’s plans. It is important to revisit your financial plan to ensure it is still delivering the intended value and the best chances of success.
• Consider the unexpected: the Labour Party has pledged not to increase national insurance, income tax, or VAT. But it has refused to confirm it will not make changes to capital gains tax rules, which could affect those with non-tax wrapped portfolios or Buy-To-Let properties. Those in this position should consider the serious impact this could have on the net gains from their portfolios and seek to optimise their capital gains positions.

… and most importantly:

• Talk to your adviser: Change is inevitable, and it’s essential to understand how changes in government might affect your and your family’s circumstances. If you have any questions or concerns about how the UK’s regulatory environment might affect your finances, get in touch with 7IM. We’re passionate about financial planning, and we believe in the power of listening to our clients’ ambitions and creating a plan that will help them at every stage of their financial journey.

¹ Resolution Foundation: https://www.resolutionfoundation.org/publications/an-inherited-problem/