The outcome of the general election in the UK has the potential to have a huge impact on the future of investors, individual stocks, investments and the stock market.
We here at Meredith Charles have provided a brief overview of the potential policy changes proposed by both the Labour and Conservative parties in the general election and what this means from an investors standpoint.
For every £1 of extra day to day spending being promised by the Conservatives, there’s £28 of additional spending being offered by Labour. This statistic highlights the ambition of Labour’s plans compared to the modesty of the Conservative plans.
Labour is promising to spend 83 billion pounds, while the Conservatives are promising to spend 3 billion pounds. The level of spending suggested by Labour has the potential to rewrite the economic landscape of the UK, whereas the Conservative party it can be argued are playing it very safe.
Each of the proposed policies is radically different in approach and each has its own benefits in the eye of the beholder. Although, Labours plans means that they will have to significantly raise taxes in order to pay for the spending that they’re promising.
We have examined how these potential tax increases will affect tomorrows investors below.
Boris Johnson’s pledge for the Conservatives is that there will be no change to income tax and a small change in the level at which people start paying National Insurance, increasing the threshold from £8,632 to £9,500 by 2020-21.
Labour on the other hand, promise there will be no change for those earning up to £80,000 per year, but those earning over £80,000 will be subject to a 45% tax rate, with a new 50% tax for those earning over £125,000.
This income tax hike may mean that people on the £80,000 threshold will have less disposable income to put towards any investments. It is also an interesting dividing line considering the Financial Conduct Authority only classifies an individual as High Net Worth if they have an income of £100,000 or more.
Capital Gains Tax And Dividends
Currently, UK investors have an annual £2,000 dividend allowance with a tax of 7.5%, 32.5% and 38.1% depending on your tax bracket. Similarly, there is a £12,000 capital gains allowance, with tax rates set at 10%, 20% and 28% respectively.
Under Labours plans, both the capital gains and dividend allowance would be cut to £1,000 and tax rates would equalise whatever your income tax rate is, so it has the potential to reach 50% for high earners.
The Labour proposition is that any gains from wealth essentially should be taxed in the same way as gains from income. Capital gains and dividends are obviously important parts of an investors total return and the tax situation may deteriorate considerably for investors should this policy come into force.
Financial Transaction Tax
The financial transaction tax is a basically stamp duty on financial institutions trading in a spectrum of stocks and derivatives proposed by Labour. Everytime a stock or share is traded a financial transaction tax would be applied.
Labour estimates that this tax has the potential to raise abound 8.8 billion pounds. The tax would certainly have a detrimental impact on investment portfolios and on pension funds. Although the tax system rewards buy-and-hold investors.
The Conservatives initially had plans to reduce corporation tax from the current 19% down to 17% but have since postponed this idea.
In contrast, Labour has said they would reverse many of the corporation tax cuts that we’ve seen in the last decade and revert back to a level of 26%, the same level that it was in 2011. Increased corporation tax has the potential to affect a company’s profits, in turn affecting dividends for shareholders.
Nationalisation Of Services
Labour want to nationalise rail and possibly water and energy companies. Labour have stated that they will pay fair market value for these businesses, but investors who have already invested in these shares may be feeling anxious as there is the potential to lose a considerable amount of money. It’s unlikely that investors in with stocks/shares within these sectors would be paid cash as they are more likely to be given government bonds for their stock.
Both parties have taken very different approaches to taxation and public services but it’s undoubtable that High-Net-Worth investors will face new challenges moving forward. Whatever the political or economic landscape looks like come Friday morning, we are confident that investors will adapt and find new opportunities to generate yield – as they have always done.
The views expressed in this article are those of Meredith Charles. They should not be considered as advice or recommendation to buy, sell or hold a particular investment. They reflect our personal opinion and should not be solely relied upon when making investment decisions.