TaxSep 18 2019

Corbyn govt could affect IFAs

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Corbyn govt could affect IFAs

As political infighting continues in the Conservative party, the prospect of a Corbyn government has become more of a reality.

The chances of a government led by Jeremy Corbyn, leader of Labour party, appeared to be remote, but with Prime Minister Boris Johnson recently losing a vote to pursue a no-deal Brexit, the prospect of a general election has become more likely. 

So, a new prime minister could be on the cards, triggering concerns of how financial advisers and their clients will affected by various Labour policies. 

So what is at stake? 

Nationalisation

Several in the industry warn that pension pots will definitely suffer a shortfall due to Labour plans to nationalise key infrastructure areas. 

Speaking at the TUC Congress earlier this month, Mr Corbyn said: “We’ll bring rail, mail, water and the national grid into public ownership, so the essential utilities that people rely on are run by and for the public, not just shareholders.”

George Bull, senior tax partner at RSM UK, says: “Because infrastructure investments will constitute part of the fund value for almost every defined benefit and defined contribution pension arrangement, the effect of nationalisation at less than current market value must be considered carefully by a Corbyn government if chaos is to be avoided.”

Mr Corbyn has announced plans to regain control of Britain’s infrastructure networks as part of an overhaul of nationalisation policy.

Key points 

  • Everyone is looking at Labour’s economic policies due to the possibility of an election
  • Plans to nationalise infrastructure could affect pensions
  • Buy-to-let could also be massively affected

This will include most of the UK’s privately run infrastructure, namely the rail and water industries. 

Mr Bull says while there might be some advantage for early movers, the general impact would be a reduction in fund values.

The Global Infrastructure Investor Association has warned that more than 100 UK pension schemes are invested in infrastructure sectors that would be affected by nationalisation. 

This amounts to roughly 8m pension pots, mostly from the public sector. 

Mr Bull says this would lead to pensions potentially struggling to achieve their retirement goals, particularly in the last five years of people’s working lives and during retirement if they relied on drawdown. 

He notes: “In the case of employees with DC funds, the reduction in forecast pensions which would follow nationalisation at less than full market value raises the spectre of workers taking industrial action in consequence of changes imposed by, of all things, a Labour government.”

We may see a curtailment of George Osborne’s pension freedoms, with a move back towards annuitisation Tom McPhail

Mr Bull suggests for employers with DB schemes, shortfalls would arise that would necessitate increased contributions, while also affecting their published accounts and potentially hastening conversions to DC.

Kay Ingram, director of policy at LEBC, agrees. 

“Nationalisation achieved without paying fair market value will result in every saver and pension scheme losing money. That could threaten the solvency of many [DB] pension schemes, putting the Pension Protection Fund under pressure,” she says. 

But Steve Webb, former pensions minister and director of policy at Royal London, takes a more neutral stance. 

“Higher interest rates seem likely under a Labour government, which is good news if you are buying an annuity, but less good news if you are running a company pension scheme if your deficit increases as a result.”

But he says the biggest impact of a Labour government will be through its wider economic policies rather than through any individual measure.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, expects a Labour government to reduce various rates of tax relief. 

Mr McPhail says we could see the following changes to pensions:

  • A reduction in the annual allowance;
  • A freezing of the state pension at 66;
  • A cut in the lifetime allowance.  

He adds: “We may see a curtailment of George Osborne’s pension freedoms, with a move back towards annuitisation.”

Crackdown on tax 

Most experts warned that one of the most radical changes that could result from a Labour government is an overhaul of inheritance tax.

A report called Land for the Many published by Labour in June 2019 suggested that IHT should be abolished and replaced with a lifetime gifts tax levied on the recipient. 

Under this system, tax would be levied on the gifts received above a lifetime allowance of £125,000. 

The report suggested when this lifetime limit is reached, any income from gifts would be taxed annually at the same rate as income derived from labour under the income tax schedule.

The report said: “The Resolution Foundation estimate that taxing gifts through the income tax system would raise £15 billion in 2020-21, £9.2 billion more than the current IHT system, and would do so more progressively.

Mr McPhail says clients should maximise all the tax reliefs now where possible as Isas, pensions, capital gains tax, IHT: all are potentially caught by a Labour-led redesign of the economy and fiscal system”. 

Mr Bull says: “The possible replacement of [IHT] with an income tax liability on the recipient’s gifts is causing a major headache for parents who had been thinking of making gifts to their children at a later date, perhaps to help them get on the housing ladder.”

He adds: “I know of families who are accelerating gifts to their children to ensure that they fall within the current tax regime. That’s fairly straightforward if the children are currently aged 18 or more. It’s not so straightforward when children are younger.”

Right-to-buy scheme

A potential Labour government could mark the demise of the buy-to-let market and reduce profitability for the UK’s 2.6m landlords, industry figures warn. 

Bruno Welch, managing director and mortgage consultant at Clayton-Welch Associates, says: “If a Labour government were to get into power the impact on the buy-to-let market, based on their planned proposals of a right-to-buy scheme, could be catastrophic.”

The policies, if implemented, will give tenants the right to buy their rented properties for a reduced price. 

Buy-to-let landlords have already suffered losses with various policies adopted by the Conservative government, when Mr Osborne, then chancellor of the exchequer, increased stamp duty land tax from 3 to 6 per cent on second homes. 

Mr Bull says: “Private landlords find themselves between a rock and a hard place. Should they sell an investment property now, while property prices are depressed or declining and risk losing money? Or should they hold onto the property in the hope that values will recover, but risk having to sell at a much greater discount under a Corbyn government right-to-buy scheme?”

Becky O’Connor, personal finance specialist at Royal London, says that Labour’s approach to buy-to-let will be enough to give “even the most sanguine landlord the heebie jeebies.”

She believes the possibility of rent controls and offering private tenants ‘right to buy from their landlord would mean buy-to-let loses its shine for many investors. 

However, she adds that the extent to which landlords are deterred would also depend on what happens to house prices. 

“If house prices continue to decline, some landlords may spy more bargain buying opportunities that offset some of the potential losses they face.”

Ms O’Connor adds: “On the other hand, slowing house price growth might act as a deterrent to more cautious, would-be landlords.”

Saloni Sardana is features writer at FTAdviser and Financial Adviser