How you can keep your money out of the clutches of Comrade Corbyn

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Rise: The Labour goverment, under Jeremy Corbyn, are set to raise taxes if they get into power


Lord Sugar took time out last week from lambasting contestants in The Apprentice to state that if Jeremy Corbyn becomes the next Prime Minister, he will quit the UK.

While Sugar, once a big Labour Party donor, has the financial wherewithal to up sticks, it is not an option for most middle-class households who face a barrage of tax rises if Labour wins the next Election. So what can you do to protect your family?

Maximise pensions 

There is little doubt that a Labour Government would abolish higher rate tax relief on pension contributions on the grounds that such a savings incentive benefits ‘the few, not the many’.

Rise: The Labour goverment, under Jeremy Corbyn, are set to raise taxes if they get into power

Rise: The Labour goverment, under Jeremy Corbyn, are set to raise taxes if they get into power

For the record, there are more than four million people who now pay 40 per cent income tax – hardly ‘few’. 

Indeed, there is an outside chance that Philip Hammond, the incumbent Chancellor, may even have axing the higher rate tax relief in his sights in just over three weeks’ time as a result of the Government’s pledge to invest an extra £20 billion in the National Health Service by 2023. 

Scrapping higher rate relief would be an easy target.

It is also not inconceivable that Labour would reduce the annual amount that can be invested into a pension and which is eligible for tax relief. This currently stands at £40,000 and includes any employer contributions made on your behalf.

WHAT TO DO: If you have any spare cash and are a higher rate taxpayer, you should direct as much money as you possibly can into a pension.

Indeed, for some who have already used this tax year’s annual allowance, they can take advantage of something called ‘carry forward’. 

This enables them to sweep up any unused pension allowances from the three previous tax years, starting with the earliest (so, the tax year starting April 6, 2015), and setting any of these contributions against this year’s income tax liability.

For big earners – £150,000 plus a year – their pension options are already restricted because of something called the tapered annual allowance. 

This reduces their annual allowance from £40,000 to £10,000 dependent on how much income they earn above £150,000.

Threat: Lord Sugar has said that if Jeremy Corbyn becomes Prime Minister, he will quit the UK

Threat: Lord Sugar has said that if Jeremy Corbyn becomes Prime Minister, he will quit the UK

Threat: Lord Sugar has said that if Jeremy Corbyn becomes Prime Minister, he will quit the UK

There are also contribution restrictions if you are aged 55 and over and have already taken advantage of ‘freedom’ rules (introduced in 2015) to access money from a pension.

Ned Francis, financial planning consultant at wealth manager James Hambro & Co, says: ‘The rules on pension contributions are fiendishly complicated and you have to be careful not to trigger traps. So if you are in a position to inject a lot into your pension take financial advice.’

It is not inconceivable that pensions could be hit by Labour in other ways – for example, through the introduction of a wealth tax or a clampdown on the amount of tax-free cash that can be drawn from a pension, currently set at 25 per cent.

But Alan Steel, chairman of financial adviser Alan Steel Asset Management, says investors should not be deterred. He says: ‘In the 1970s, Labour threatened a wealth tax, only to back off. I take comfort from the fact that if that tax had gone ahead, people’s main homes and their accumulated pension pots would have been exempt.

‘Of course, a Labour Government this time around may have a different idea but my advice is to maximise your pension contributions sooner rather than later.’

Ring-fence from tax 

Although it was Labour Chancellor Gordon Brown who launched tax-friendly Individual Savings Accounts in 1999, a radical Left-wing Labour Government could easily decide to clip their wings.

This could be done by either reducing the annual allowance – currently £20,000 – on the grounds that few investors take full advantage of it. Or by introducing a lifetime allowance similar to that already applying to pension pots – with any excess then subject to tax.

WHAT TO DO: As with pensions, you should seek to use your Isa allowance while it remains so generous. A family of four, for example, can protect as much as £48,520 a year within Isas – £20,000 per adult and £4,260 per child (in a so-called Junior Isa).

For 16 and 17-year-olds, a quirk in the rules means they – or parents on their behalf – can contribute to both a Junior Isa and a cash (not investment) based Isa in the same tax year. So, a maximum £24,260 in the current tax year.

Protect: By sending money to a partner paying lower tax rate, overall tax bills can be reduced

Protect: By sending money to a partner paying lower tax rate, overall tax bills can be reduced

Protect: By sending money to a partner paying lower tax rate, overall tax bills can be reduced

Bank capital gains 

Currently, capital gains taxes are at their lowest rates throughout history. But that is unlikely to remain the case for long under a Labour Government with a ravenous appetite for taxing wealth.

Anyone realising gains in the current tax year is exempt from tax on the first £11,700 of profits – be it gains from shares, a second home or buy-to-let property.

Gains above this amount are taxed according to whether you are a basic (20 per cent) or higher/additional rate (40 or 45 per cent) taxpayer.

The rates are 10 and 20 per cent respectively – 18 and 28 per cent in the case of property sales that are not a person’s main home. Given Labour’s disdain for wealth, it would at the very least look to align capital gains tax rates with income tax rates.

WHAT TO DO: Anyone sitting on sizeable capital gains should consider crystallising some profits while tax rates are so favourable. The £11,700 allowance this tax year cannot be rolled over into the next if not used – it is lost – so it is worth reviewing whether it is time to bank any profits.

If banking gains, you could then be shrewd and use them to fuel additional contributions into tax-friendly pensions and Isas, thereby potentially ring-fencing more assets from a future Labour Government. 

Under ‘bed and Isa’, it is possible to sell shares held outside an Isa – crystallising any capital gain – and then rebuy them inside the plan. Your overall investment portfolio remains the same but is slightly more tax efficient as a result. There will be charges, including 0.5 per cent stamp duty.

Transferring assets 

Transferring assets between married couples and civil partners does not trigger any tax charges such as capital gains. As a result, it represents one of the simplest, but most effective, pieces of tax planning available. 

By moving assets to a partner who is paying a lower rate of tax, overall tax bills can be reduced – and the threat of Labour and higher income tax rates partially mitigated.

Jason Hollands, a director of wealth manager Tilney, says: ‘Transferring savings to a spouse is simple and with most banks can be done online or at a branch. Similarly, shares and investment funds can also be transferred, usually with little cost incurred.’

WHAT TO DO: Ensure family savings and investments are set up tax efficiently.

For example, if a higher rate taxpayer has £100,000 in a savings account paying a generous 1.3 per cent, they will earn interest this year of £1,300 – £500 of which will be tax free as a result of their personal savings allowance. This will result in a tax bill of £320 – 40 per cent of the £800 excess.

But if the higher rate taxpayer moved £65,000 of these savings into their spouse’s name, and they are a basic rate taxpayer, then the deposits would escape tax altogether.

Labour Councillor Gordon Brown initially launched tax-friendly ISA's in 1999

Labour Councillor Gordon Brown initially launched tax-friendly ISA's in 1999

Labour Councillor Gordon Brown initially launched tax-friendly ISA’s in 1999

This is because the £35,000 remaining with the higher rate taxpayer would generate interest of £455, within their tax-free savings allowance.

The basic rate taxpayer would receive £845, within their larger tax-free savings allowance of £1,000.

The same strategy can prove effective on shares. Take for example a higher rate taxpayer who has a £100,000 investment portfolio which generates four per cent annual income – £4,000.

Under the current dividend tax regime, the first £2,000 is tax free with any surplus attracting tax at 32.5 per cent – so a £650 tax bill.

But if half of these investments are transferred to a spouse who pays basic rate tax, there is no tax. This is because both can use their tax free £2,000 annual dividend allowance to protect the income they receive – £2,000 – from tax.

Your next steps… and if all else fails, you can ‘do a Lord Sugar’

1) If you have children at a fee-paying school, see if the bursar is prepared to offer a discount on fees paid in advance, covering multiple years. 

Although this will not allow you to escape Labour’s plan to charge 20 per cent VAT on private school fees – VAT is due when a service is delivered – it will help you mitigate the impact.

2) Consider reshaping your investment portfolio to take into account a weaker pound under Labour. A falling pound is bad for listed businesses reliant on imports and which see their costs rise. 

But it is good for companies which generate a big chunk of their earnings overseas. A diversified investment portfolio, with both UK and international exposure, is the best idea.

Useful tips: If your child is at a fee-paying school, see if the bursar will offer a discount on fees paid in advance

Useful tips: If your child is at a fee-paying school, see if the bursar will offer a discount on fees paid in advance

Useful tips: If your child is at a fee-paying school, see if the bursar will offer a discount on fees paid in advance

3) Some people with large pension pots that they have not contributed to in the last couple of years could see if they are eligible for a higher lifetime allowance. 

The value of assets that can be accrued under a pension without being subject to punitive tax when benefits are taken is currently capped at £1.03 million. 

Any fund surplus is liable to tax when it is accessed – 55 per cent if it is taken as a lump sum rather than income. But recent non-contributors could apply for something called ‘fixed protection 2016’ which allows them to lock into a £1.25 million allowance.

4) Ensure your mortgage rate is fixed. Interest rates are rising but a plunge in the value of sterling following the election of Labour could cause them to soar.

5) Protect your assets from the threat of higher inheritance tax rates. This can be done by making gifts using an assortment of allowances – the ‘annual’ £3,000 allowance, the ‘small gifts’ allowance of £250 per person and regular gifts from income (provided they do not impact on your lifestyle). 

Other tax-free gifts can be made provided you survive for at least seven years.

6) If you own an overseas property, think about opening a foreign currency account (if you have not done so already) and shovel money into it. This will provide protection against a falling pound.

7) Assess whether you still need to hang on to a buy-to-let property. Recent tax changes have made it more difficult for investors to make a profit. Labour does not like second-home owners.

8) Consider investment bonds that allow you to take limited annual income without triggering an immediate tax charge. The bond can be cashed in when most tax advantageous.

9) See an independent financial adviser who will give you a financial MOT and ensure your finances are robust enough to withstand anything – politically, economically or financially.

And finally: ‘Leave the country? Not such a daft idea if you fear the worst.’ So says adviser Alan Steel, echoing Lord Sugar’s woes.

The MoS panel of experts: Alan Steel, Alan Steel Asset Management; Jason Hollands, Tilney; Patrick Connolly, Chase de Vere; and Ned Francis, James Hambro & Co.

 



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