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On 8 August 2024, Rachel Reeves gave her first speech to parliament as the UK’s new Chancellor. Many analysts were predicting that she would announce a series of tax rises in areas such as capital gains tax, pensions or inheritance tax (IHT). In the end, the headline announcement was the abolition of the universal Winter Fuel Payment for 10m pensioners.
Many investors and taxpayers breathed a sigh of relief. However, the Chancellor’s speech (and other public comments she has made since) suggests that tax reforms are not off the agenda. Indeed, they may simply arrive a bit later – and in different forms – than many expected.
Below, we explore what the new Chancellor might mean for investors. To learn more about our EIS projects and other early-stage opportunities, visit our portfolio page. For enquiries regarding our latest projects and funding, you can reach us via:
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Conflicting narratives
It is difficult to discern exactly what the new Chancellor and wider government believe about economics and fiscal policy. Partly, this is because Labour lacks a “Grand theory underpinning their plans for growth” (according to Paul Lee at the London School of Economics).
Rather, the Party seems to lean towards pragmatism, technocratic intervention and a “hint” of supply-side policies to boost national income. This contrasts greatly with 1997, when Tony Blair led Labour to power based on a confident macroeconomic theory.
Labour’s approach in 2024 may be partly due to nervousness about trying further “ideological experiments” which some argue have failed (e.g. Brexit, Truss’s “Mini Budget” and Corbynism). Indeed, the Party attacked the incumbent Conservatives on fiscal policy during this year’s general election campaign, pointing out that taxpayers were weighed under the heaviest tax burden since the Second World War.
It seems likely that Labour’s election strategy relied strongly on winning votes from disaffected Conservative voters who were fed up with the (then) government. This might explain Labour’s key message during its campaign, which promised no raised taxes on “working people”. Now that the election is won and Labour have five years or more in power, will this message hold?
A brief overview of Rachel Reeves can highlight some of these tensions in Labour Party ideology and strategy. Earlier in her career, she proposed reforms which would have increased taxes on higher earners’ pension contributions. However, as current Chancellor, she has opposed scrapping the two-child benefit cap and has scrapped the Winter Fuel Payment for pensioners not receiving benefits/tax credits.
What this means for investors
Unfortunately, the above approach to fiscal policymaking creates great difficulties in predicting what might emerge in the 2024 Autumn Statement. One certainty is that government spending currently exceeds taxation revenues. Another is that the national debt has now ballooned to nearly 100% of GDP, creating a huge sunk cost to the taxpayer.
In short, the UK’s economic realities dictate that Labour will have to decrease spending, increase taxation or borrow further. None of these options is particularly appealing. Yet, as Reeves pointed out in her speech, the UK faces a large “black hole” in its finances (£22bn in her estimation), which needs addressing.
Lowering spending in the Winter Fuel Payment has already proven very unpopular, leading many analysts to proclaim that Labour’s “Honeymoon Period is Over” as approval ratings for Prime Minister Starmer and Chancellor Reeves fell. Raising the borrowing level to unsustainable levels could lead to investor flight from the UK, potentially causing a currency crisis (or a wider economic crisis).
This leaves taxation. Labour made a very clear promise not to raise National Insurance (NI), income tax or VAT during the general election campaign. However, these promises do not necessarily extend to other key areas of tax which could affect investors, such as:
- Capital gains tax (CGT)
- Dividend tax
- Inheritance tax (IHT)
- Pensions
Tips and insights for investors
Right now, we are purely in the realm of speculation about what the Chancellor may decide for UK fiscal policy in the coming months. However, the Chancellor has shown the ability to surprise pundits with the Winter Fuel Payment. This also suggests she is willing to take unpopular decisions which pay prove political costly, but economically expedient.
This leads us to believe that tax changes are quite likely in the Autumn Statement in October/November. Indeed, Reeves has already publicly confirmed that this will happen. Options on the table might include:
- Equalising CGT rates with income tax bands.
- Changing the 25% tax-free lump sum rules for pensions.
- Altering the IHT system to increase receipts.
- Equalising tax relief for pension contributions across the basic and higher rates.
To mitigate against different potential outcomes, investors should consider seeking financial advice, allowing for maximum preparation time. For instance, using the “Bed and ISA” approach could help certain investors reduce their CGT liability. Others might benefit from using the “deferral mechanism” for CGT, which is available under the Enterprise Invesment Scheme (EIS).
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