As UK adults headed to the polls on 4 July, it seemed the result was already all but confirmed.
Keir Starmer’s Labour had led in the polls all the way up to the day of the general election, and so the victory of a Labour government felt more like a formality than news.
The result means we now have the first Labour government in power since 2010, and you may be wondering how this could affect you.
A new government could have far-reaching consequences for your finances, as changes in leadership are usually accompanied by the implementation of new policies. We’ve already seen some ideas of what could happen with the plans laid out in Labour’s manifesto, too.
So, read on to find out what could happen during this Labour government, and how this could affect your wealth.
The new government has ambitious plans for change
A big part of the reason that a new government could be concerning is that it might have different economic priorities to its predecessors. In turn, this could mean significant policy changes that could be consequential for your wealth.
Labour has already announced some lofty aims for their time in government. As outlined in their 10 Labour policies to change Britain, some of the party’s pledges include to:
- Deliver 2 million more NHS appointments a year, bring back the family doctor, and improve local NHS care
- Set up Great British Energy, a new publicly owned British energy company
- Put passengers first and establish Great British Railways
- Make the minimum wage a genuine living wage
- Offer free breakfast clubs in every primary school in England.
These ambitious pledges are undoubtedly costly, and will need funding somehow.
In fact, in response to the Labour manifesto, the Institute for Fiscal Studies (IFS) said in June that the pledges left “literally no room – within the fiscal rule that Labour has signed up to – for any more spending than planned by the current government.”
As a result, Keir Starmer’s government will need to find a way to fund these spending plans.
Borrowing is one option for this, and tax rises, changes, and freezes are another. So, we might yet see movements that could potentially increase your tax liability.
Tax could be a source of contention for the Labour government
It’s certainly worth keeping an eye on announcements and changes around tax that could affect your wealth over the next five years of Labour leadership.
The government has already committed to keeping certain taxes and thresholds the same, including:
- Income Tax, and the basic-, higher-, and additional-rate thresholds
- National Insurance
- Corporation Tax
However, no such mention has yet been made of key taxes such as Inheritance Tax (IHT) or Capital Gains Tax (CGT). So, these could be targets for change to fund the government’s spending plans.
For example, one possibility is CGT rates being aligned with those of Income Tax. This would effectively double the rate of CGT in each tax band, with higher- and additional-rate taxpayers seeing their tax rate rise from 20% (24% for property that isn’t a main residence) to 40% or 45% respectively.
Similarly, another is the prospect of pensions being brought under the IHT regime. Currently, pensions fall outside of an estate for IHT purposes, offering a planning opportunity to pass on wealth tax-efficiently in the pension wrapper. Labour could choose to remove this benefit, making pensions part of estates and so chargeable under IHT rules.
Changes could even be less direct than these. Indeed, Labour has already promised to reverse some of the tax breaks that private schools benefit from. While this might not increase your personal tax liability, you could see these costs passed onto you if your children or grandchildren attend a fee-paying school.
Of course, we will need to wait and see what happens in Rachel Reeves’ first Budget as the new chancellor. Labour has already committed to just one fiscal event each year, and it is expected that the first Budget will take place in October, owing to the parliamentary recess and party conferences.
It could be sensible to watch out for any changes announced during this Budget so you can adapt your financial plan accordingly.
Building 1.5 million homes over 5 years to tackle the property shortage
The UK’s property shortage is one of Labour’s priorities, with the party promising to build 1.5 million homes over the course of the five-year parliament. Within this pledge, Labour has said they will publish new design codes, in an effort to raise the quality and longevity of the new developments.
To achieve the housebuilding target, Labour has said they will reintroduce the mandatory local housing targets that the Conservatives previously scrapped.
Furthermore, while Labour has committed to maintaining the green belt, they want to prioritise building on brownfield and “grey belt” land – that is, areas designated to be on protected green belt but that are not empty countryside, including disused industrial areas and wasteland.
As part of these property plans, Labour has pledged to help first-time buyers (FTBs) in particular to get onto the property ladder. The government says it will ask local authorities to give FTBs the first chance to buy homes, as well as introduce a permanent mortgage guarantee scheme.
According to Labour, these changes will help 80,000 young people get on the housing ladder over the next five years. These measures could be welcome news if you are an FTB, or you have a child or grandchild looking to buy property for the first time in the near future.
Long-term market performance is often stronger under a new government
One of the most significant concerns you may have about the Labour government is what could happen to your investment portfolio.
While past performance does not necessarily indicate future performance, it is still worth reviewing historical market data for when a government changes hands.
Interestingly, the answer is that UK markets tend to favour a new government, regardless of political persuasion. AJ Bell assessed the performance of the FTSE All-Share since its inception in 1962, and found that a change in government led to increases in value of:
- 6% one year before polling day
- 8% one year after polling day
- 9% throughout the term of the government.
For the sake of comparison, the increases in value when the incumbent party won were:
- 8% one year before polling day
- 9% one year after polling day
- 1% throughout the government’s term.
So, a change of government could be good news – although it’s worth bearing in mind that the Conservatives have typically overseen stronger overall capital return on the FTSE All-Share.
Indeed, AJ Bell’s data shows that when the Conservatives have succeeded historically, they’ve overseen an 18% increase throughout the term of their government in real terms. That compares to a rather meek -9% over the term of a Labour government.
Regardless, it’s worth remembering that this sort of broad-stroke data might not necessarily mean anything to your portfolio. Changes in government, either in the UK or further afield, can affect markets, and potentially the value of your investments, too.
It can be beneficial to carefully construct a diversified, well-balanced portfolio, made up of varied investments from across different countries, regions, sectors and industries. That way, any temporary fall in value caused by an election or political event in one country could be offset by gains elsewhere.
Your financial plan is built to withstand changes like this
When uncertain events like a change of government occur, it can be difficult to stay calm and collected. You might want to act now to get ahead of the rumoured tax changes and the fallout that could affect your investment portfolio.
At times like this, it’s crucial to take a breath. Remember: your financial plan is purpose-built to withstand uncertainty like this. So, before you go making changes with your wealth, it’s worth stepping back and waiting for a moment.
In time, Labour’s plans will become clear, and you’ll be able to make informed decisions with your wealth. But in the meantime, staying calm and doing nothing can be the most important action to take.
Get in touch
We can assist you in keeping a level head when significant events give you concern over your wealth. Furthermore, we can help you respond to and find the opportunities as and when Keir Starmer’s government announces updates and changes.
If you’d like to find out more, please email hello@fingerprintfp.co.uk or call 03452 100 100 today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
