With the election next week, it is good time to look at how markets might react to different outcomes, and the impact on your personal finances – “Corbyn-proofing” has been the media darling of recent weeks.
First, I’ll touch on investment problems and opportunities (there is a Corbyn silver lining which will surprise many). Second the broader Corbyn-proofing of finances (updating our August blog).
At the moment, the odds of a Tory majority are strong at 1/2, whereas those for a Labour majority are a long way out at 28/1. No overall majority is just 2/1. The betting odds suggest that the greatest likelihood if there is no Tory majority (or Tory-led coalition) is a Labour-led coalition, in which case some of the more extreme possibilities in the Corbyn-proofing section become more likely due to their likely coalition partners.
Investment problems and opportunities
Firstly, it must be said that long-term research highlights that over the complete electoral cycle there is no significant difference in stock market performance between left- and right-leaning governments. This is the same in the UK and US. This is not what most might expect, as views are coloured by individual political bias.
The difference, and opportunity, occurs around the time of the election itself.
If a left-leaning party (Labour) is elected the market will fall sharply (ditto with a Labour-led coalition).
At this point, after these falls, you should buy smaller companies – the increased spending on the domestic economy will have the greatest benefit in this sector in the years following. The outperformance of smaller companies from those lows can be considerable over the whole electoral cycle – that’s what history tells us should be the trend if Labour is elected.
And that’s before taking into account some current peculiarities.
For example, we now have the added amplifier that whoever wins is committed to considerable increases in spending, the end of austerity, which is bound to give a boost to the domestic economy. Again, this will aid smaller companies, but it also highlights the opportunity in Value-style sectors and funds, which tend to be cyclical. Moreover, the Value-style has hugely underperformed over the last 10 years. We will highlight specific funds after the election.
Labour is going to be very focussed on the dark side of big tech – so be wary of tech stocks and funds – and this will be a growing issue for governments globally.
Ignoring all the other global issues, which in scale are much bigger concerns, here is my thinking if Labour win…
- Expect prices to fall quickly, say 10-20%.
- Then buy UK smaller companies and UK Value-style funds. Be brave!
You don’t need to do anything ahead of the election – but be prepared for days following, particularly if Labour is elected, or a Labour-led coalition.
Corbyn-proofing of finances
The Labour manifesto is more a mammoth wish-list, with a touch of Lewis Carroll [for balance, none were terribly inspiring or realistic. Even if it was possible to raise the required taxes (which is far from clear) there is simply not a Civil Service big enough to deal with the tasks outlined.
Nonetheless, the intent, the direction of movement, is absolutely clear.
The list below is based on some actual statements, some sensible assumptions, and some speculation.
- Assume 45% income tax on earnings over £80,000, and 50% on income over £125,000. [Coincidentally, people earning more than £73,500 a year already pay more than half of all income tax]
- Capital gains tax will increase to your highest income tax rate (meaning 50% maximum, whereas currently 20%)
- Capital gains tax will be paid on gains over £1,000 (currently £12,000)
- The insurance premium tax on private healthcare will increase.
- Tax shelters such as ISAs and pensions and VCTs are likely to come under attack.
- The greatest pain will be felt by those with income between £80,000 and £200,000, rather than those with the very highest incomes.
- Higher rate tax relief on pension contributions will be scrapped, and tax-free cash will be abolished or limited. The inheritability of pension funds will also come under scrutiny.
- A variety of aspects of inheritance tax might be reformed, in particular the rules which currently make it easier to pass on the family home
- The pressure on those owning second homes will increase.
- A mansion tax has been mooted in previous years, but is probably impractical. Higher tax on second homes is more likely.
- Capital controls, that is restrictions on the flow of capital in and out of the country, feel like a remote possibility, but the possibility shouldn’t be ignored in extremis.
- Corporation tax will be increased to 26%.
- Entrepreneurs Relief will be reformed. Either the relief will go down, or the level at which it applies will come down, possibly both.
- The undistributed profits of small companies, “close” companies controlled by five or fewer people, could be taxed as though they have been distributed to shareholders.
- Make sure you maximise contributions to tax-advantaged wrappers such as pension, ISAs, VCTs before the rules change.
- Consider taking the tax-free cash earlier than required, in case this benefit evaporates.
- Realise capital gains at the current lower rates if you can.
- Consider making gifts, for example to a spouse who is in a lower tax band.
- Consider gifting property or other assets to children.
- Business owners might bring forward dividends and bonuses and capital gains while tax rates are lower.
- Small business owners may act now to take advantage of Entrepreneurs Relief.
- Bring forward bonuses and other earnings where possible.
- Where you have an overseas property, consider depositing somewhat more at a local bank.
- Where you have the option for a non-UK passport, take advantage of this. This always makes sense whatever the government.
- Don’t assume that setting up trusts may have the desired effect. Not only will the tax benefits of these be subject to review, but Labour has also said they want to see the public disclosure of trusts, and this creates the risk of trial by media and the witch hunts.
- In contrast arrangements outside the UK tax jurisdiction might still have some value, but can be both complex and expensive.
Right now, there is little to do other than take the opportunity to review your arrangements, and consider what action might be prudent once the election outcome is clear. As always, where you feel appropriate, do get in touch with your regular adviser.