How to protect your wealth from future Labour tax raids

Tax rises? Under a Labour government, many believe it’s a case of when, and not if.

Throughout the general election campaign, party officials have stressed there are “no plans” to increase taxes beyond their stated manifesto pledges. But given the shocking state of the nation’s finances, the wealthy and their advisers believe future hikes are inevitable now the party has the keys to Number 10.

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

That does not leave much wriggle room if economic growth is weaker than expected, so speculation about what tax levers could be pulled in future has been dominating conversations between advisers and their clients.

Second-guessing changes to tax rules that might never happen is a risky business. However, higher earners and the wealthy are weighing up the risks of pre-emptive action against the rewards of lower tax bills in future if their strategising pays off.

Other than leaving the country, here are four ways that the richest hope to “Labour-proof” their finances against possible future tax rises.

Consider restructuring your investment portfolio

Advisers say tinkering with capital gains tax (CGT) is the most obvious way of levying a wealth tax by another name. 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 say a sell-off has already started as some wealthy clients are fearful that 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 rates of tax on any gains in future,” says Katherine Waller, co-founder of Six Degrees, a wealth manager.

Many of her clients are entrepreneurs who tend to have large allowable tax losses that they can use to offset gains, which could sweeten the pill of taking a pre-emptive CGT hit. Another strategy would be to store up any allowable losses to use if CGT rates rise in future, but she fears Labour could put a time limit on the use of these. “It’s also not beyond the realms of possibility that capital losses will be capped in future.”

Christine Ross, client director at Handelsbanken Wealth, also has clients who are carefully reshuffling their investment portfolios. “They will generally sell [a shareholding] and immediately purchase similar investments so that the current capital gains tax rate is banked,” she explains. “It has to be in different shares because the UK tax rules negate this form of planning if the same shares are repurchased within 30 days of sale.”

Investment platforms also report that customers are aiming to beat a future increase by selling shares held within general investment accounts and repurchasing within Isas, making use of their spouse’s £20,000 annual allowance as well as their own.

Advisers are at pains to ensure reconstructed investment portfolios take maximum advantage of 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 could be attractive from a tax point of view — so long as you trust them not to spend it.

When it comes to investment properties, the fear of a future CGT increase is adding to financial pressures facing smaller buy-to-let landlords, many of whom are opting to sell up. CGT is charged at 24 per cent for higher rate taxpayers selling second homes or buy-to-let property. It is of less concern for larger landlords who commonly hold rental properties within corporate structures. However, advisers say it could accelerate planned exit strategies and crimp levels of investment — neither of which are good news for a government chasing growth.

Labour insists it has no plans to raise additional taxes, but if any future CGT changes do occur, tax experts expect they will happen with very little warning to avoid mass pre-emptive disposals. In the meantime, asset owners spooked into selling up are swelling the coffers, which could delay the day of reckoning.

The changing purpose of pensions

The seriously wealthy seldom plan to spend the money inside their pensions, instead regarding them as intergenerational wealth transfer vehicles. However, ending the favourable inheritance tax (IHT) treatment of defined contribution pensions could prove an easy target in a future Budget, and advisers are already thinking up ways to mitigate this.

Pensions have proved an attractive target for Labour chancellors in the past. However, former pensions minister Sir Steve Webb is convinced that if Rachel Reeves , the new chancellor, is forced to pluck the pensions goose, she will want to do so “with the minimum amount of hissing”.

He predicts she will avoid tinkering with tax-free lump sums, higher rate tax relief or bringing forward increases to the state pension age — at least in Labour’s first term of office. However, advisers say clients remain deeply worried.

For over-55s who plan on drawing on their pension at some point, opting to take 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 increased two weeks before the election when Sir Keir Starmer mistakenly said in an interview that it would be scrapped in future.

Financial advisers say older clients with a plan for their tax-free cash, such as paying down a mortgage or funding children’s property deposits, have the strongest motivation to take their entire lump sum. However, they urge caution: withdrawing a quarter of your pension only to reinvest it in a general investment account puts investors at risk of future CGT bills, as well as bringing money inside their estate for tax purposes.

Those with large pensions breathed a sigh of relief when Labour’s manifesto abandoned plans to reinstate the LTA. Scrapped by former chancellor Jeremy Hunt last March, Reeves made a knee-jerk promise to reinstate it if Labour were elected — only to drop it last month. 

“That doesn’t mean it ain’t going to happen in the future,” says Webb, now a partner at LCP, noting the “general feeling” within Labour ranks 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 due to fears the LTA would be reinstated by Labour. “This is because, historically, changes to the rules have only affected uncrystallised pensions,” says Adam Walkom, founder of Permanent Wealth Partners.

Much has been made of Reeves’s previous enthusiasm for a flat rate of pensions tax relief, but Webb says he “doesn’t believe for a minute” that she would end higher rate tax relief of 40 per cent — particularly when 3mn more working people stand to be dragged into this tax band in the next five years. He expects Labour’s promised “pensions review” to be focused on directing more institutional investment into British companies.

For now, workers who are still in the “accumulation phase” can take advantage of the enlarged £60,000 annual allowance on pension contributions while it lasts. Even if Labour returns this to £40,000, advisers do not think it would be realistic to make changes before the April 2025 tax year.

With millions already battling the effects of fiscal drag, making additional pensions contributions to reduce the level of income tax paid is an extremely efficient strategy — especially for parents earning over £100,000 who could hold on to valuable childcare benefits when the system is expanded in September.

Accelerate your inheritance strategy

Advisers have long encouraged “giving while living” to reduce inheritance tax bills and start the seven-year clock ticking on potentially exempt transfers. Political change has added a new urgency, they say: some wealthy families with large estates have been accelerating the transfer of assets to younger generations, out of fear of changes to IHT under a Labour government.

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

Advisers fear any tidying up of the IHT rules in future could make it less advantageous to inherit a pension or could remove business property relief on certain Aim-listed shares when held for more than two years — a common, if risky, tactic used to reduce IHT bills. The IFS calculates that removing these reliefs could raise nearly £3bn a year.

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

Saiman 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 they reach retirement age. “Wealthy families understand the power of compounding,” he says.

Advisers report that setting up a family investment company is also becoming more popular. Family members become shareholders, and can then be paid dividends. “This could be a very a tax efficient way of covering the university expenses of children or grandchildren at university, who . . . will be subject to a low tax rate on their dividends,” Saiman says.

The use of tax deferral vehicles such as offshore bond portfolios is also on the rise. As these are subject to the income tax rate of the person who receives the income, gifting a segment to a child at university is a popular move. Bear in mind the upfront charges and advisory fees for setting up these structures.

However, there is another blissfully simple way to avoid CGT bills on investments — donate them to charity. Charities are permitted to dispose of shares free of capital gains. While they cannot claim Gift Aid on the value of the donation, individuals can offset the gross value of the gift against income tax, perhaps solving two problems in one.

School fees — grandparents to the rescue?

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

Chancellor Rachel Reeves has said she would not introduce the changes for boarding and day schools until next year, meaning measures will not be in place for the beginning of the school term in September. The policy is expected to raise £7.5bn across the course of this parliament. 

Changes could be scheduled, however, after the Easter break in April 2025. Labour did not respond to a request for comment.

Private schools have reacted by advertising advance payment schemes to get ahead of any VAT introduction. However, these may not escape the impact of the proposals.

Labour has ruled out retrospective legislation, meaning payments already made are unlikely to be subject to new taxes.

But Dan Neidle, founder of think-tank Tax Policy Associates, warned parents considering this route there is still the “very real” prospect of a challenge by HM Revenue & Customs as payments could be considered a deposit rather than an advance payment.

Parents desperate to manage the VAT problem despite stomaching an average 50 per cent fee increase in real terms since 2010, according to the Institute for Fiscal Studies, may instead wish to tap the bank of Mum and Dad.

Marco Malagoni, head of wealth planning at investment manager Waverton, said grandparents who help their children with fees can also benefit from inheritance tax advantages.

“It’s about having discretion over who benefits and when,” he added.

Grandparents can gift from surplus income — cash left over after normal day-to-day living costs — without counting towards a person’s £325,000 nil rate band.

For those making gifts from investments as well as income, a bare trust set up in the beneficiary’s name may be an attractive route as investment income is taxed against the grandchild’s personal income tax allowance.

The recipient of a bare trust also benefits from their annual £3,000 capital gains tax exemption. A grandparent making an irrevocable gift to the bare trust will trigger the seven-year clock.

Those individuals who are less clear on the potential beneficiary can set up a discretionary trust. Although funds can be dispersed with more control, they will count towards the nil rate band for inheritance tax purposes.

Additional reporting by Josephine Cumbo