How to protect your wealth from Labour

Keir Starmer promised to “not increase taxes on working people”. But could the new government spell pain for the pound in your pocket in other ways? We look at what you can do to shield your money from Labour.

Sir Keir Starmer
Sir Keir Starmer campaigning in the general election: how could the new government's policies affect your personal finances?
(Image credit: Getty Images)

With Keir Starmer and Rachel Reeves moving into 10 and 11 Downing Street respectively, savers and investors will be keen to find out how a Labour government will affect their finances.

Starmer previously announced that wealth creation was the "number one priority" if the Labour Party won the general election.

He also pledged to not raise a trio of personal taxes, and rebuffed Tory suggestions that the party would increase taxes by more than £2,000 for working households.

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Reeves - who has taken on the role of Chancellor in Starmer's cabinet - will present her Budget in the autumn. Reeves's Budget is expected to contain more detail about manifesto policies, but it could also announce a host of other tax changes.

The Labour manifesto lays bare several big changes that could squeeze high earners. This includes scrapping tax breaks on private schools, raising stamp duty for non-UK residents by 1%, and abolishing non-dom status.

Labour will also conduct a pension review - raising concerns that pension tax relief could be tinkered with - and end the use of offshore trusts to avoid inheritance tax.

A lack of assurances on other taxes and tax reliefs has got some experts worried.

“The ‘big three’ tax pledge - vowing not to raise income tax, National Insurance or VAT - is a double-edged sword because it inevitably creates suspicion about which other areas could be vulnerable,” comments Jason Hollands, managing director at wealth management firm Evelyn Partners.

Capital gains tax, inheritance tax and the tax-preferential treatment of pension saving have all featured in speculation around possible targets for a government that needs to raise revenues down the line.”

We look at what steps you can take to shelter your money from the Labour government.

Pensions: pay more in if you can

Labour unsurprisingly pledged to uphold the state pension triple lock in their manifesto. 

There was also no mention of bringing back the pension lifetime allowance, meaning savers with large pension pots can hopefully breathe a sigh of relief that they won’t be clobbered with a tax charge of up to 55% for withdrawing cash from their pensions.

However, the manifesto announced that a pension review would be coming soon: “We will undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets.”

A review could involve looking at automatic enrolment levels for workplace pensions, but it could also cover pension tax relief.

While a pension review could be just what the industry needs, simplifying the rules and getting more people saving for retirement, the ambiguity may worry some pension savers.

In contrast, the Conservative manifesto contained a pledge to “not introduce any new taxes on pensions”, saying it will keep the 25% tax-free lump sum and “maintain tax relief on pension contributions at their marginal rate”.

Hollands tells MoneyWeek: “It is well known that politicians from across the spectrum – including former Tory chancellor George Osborne – have been tempted to reduce the attractive upfront tax reliefs available for high earners, so the availability of such features should not be taken for granted and made use of, as far as possible, while they remain available. 

“Making a pension contribution is the single most straightforward way to reduce your income tax exposure, whether that is through a personal contribution or asking your employer to add to your pension in lieu of a pay rise or bonus, a process dubbed ‘salary sacrifice’.”

Basic-rate taxpayers currently get 20% tax relief on pension contributions, higher-rate taxpayers benefit from 40%, and additional-rate taxpayers get 45% relief.

While any changes to pension tax relief - if they were to happen - are likely to be several tax years away, it makes good financial sense to save more for retirement if you can, taking advantage of the tax relief, and potentially cutting your income tax bill too.

Capital gains tax: shelter your investments now 

The Labour manifesto pledged to not raise four taxes: income tax, National Insurance, VAT and corporation tax. 

Starmer said: “I don’t believe it’s fair to raise taxes on working people”, adding: “We are pro business and pro worker, the party of wealth creation.” The party promises to “cap corporation tax at the current level of 25%, the lowest in the G7, for the entire parliament”.

Labour also pledged to not increase the basic, higher or additional rates of income tax.

The elephant in the room, according to financial experts, is capital gains tax (CGT)

“The conspicuous lack of confirmation from the Labour manifesto that it would not raise CGT will spark significant concern among entrepreneurs and investors in the UK,” comments Rachael Griffin, tax and financial planning expert at wealth management firm Quilter.

Those who face CGT – primarily higher-rate taxpayers and entrepreneurs who realise gains from the sale of residential property, investments and other chargeable assets – have already seen their annual exempt allowance slashed by the previous Conservative government to just £3,000 a year. 

Griffin notes: “If Labour was to increase rates, it would serve as a double whammy with higher rates and lower exempt allowances considerably increasing the capital gains tax take.”

For those looking to mitigate the impact of CGT there are several strategies you can employ. 

Transferring assets to a spouse can be an effective way to maximise the use of both partners’ CGT allowance. Additionally, utilising tax-sheltered accounts such as ISAs and pensions can shield gains from CGT altogether. 

“It has never been more important to maximise your £20,000 ISA allowance,” says Griffin. “Other more complex options include deferring gains by investing in Enterprise Investment Schemes (EIS), however these carry significant risk and it’s important to get professional financial help when looking at these types of options.”

Inheritance tax: start planning to avoid a future liability

Inheritance tax (IHT) got a brief mention in the Labour manifesto: “We will end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here.”

This is part of Starmer’s aim to “address unfairness in the tax system”. The Labour Party also pledged to abolish non-dom status and close the loophole where private equity performance-related pay is treated as capital gains. 

Clearly, anyone using an offshore trust to avoid IHT will need to start thinking about alternative options now.

Whether Labour increases the rate of IHT (currently 40%) or reduces the nil-rate band (£325,000) over the course of the next parliament is unclear. 

Hollands points out that Labour have suggested in the recent past that it regards some of the reliefs available from inheritance tax are too generous, particularly business and agricultural reliefs. So it’s possible we could see some IHT reliefs disappear. 

According to private bank Arbuthnot Latham, online searches for "inheritance gift tax" were up 38% last month with many worried Labour would scrap valuable gifting allowances if they won the election.

But even if Starmer and Reeves do nothing - effectively continuing the freeze on IHT thresholds - more and more families are likely to be dragged into the inheritance tax net, mainly due to house price inflation.

If you’re worried about inheritance tax, it’s worth making the most of the gifting allowances to help reduce the value of your estate.

Gifts to spouses or civil partners are completely free of IHT and each tax year you can also give away up to £3,000 worth of gifts with your annual exemption. This means couples can gift £6,000 a year. In addition, there is no limit on excess income - above expenditure - that can be gifted.

You can also consider more significant gifts, but these will take seven years to see the full IHT benefit. 

School fees: prepare for higher costs

Labour reconfirmed in their manifesto that they would add VAT on private school fees if they won the election. 

The manifesto said: “Labour will end the VAT exemption and business rates relief for private schools to invest in our state schools.” The party expects to raise more than £1.5 billion in 2028-29 from the measure.

Hollands says it’s important families start planning for the extra cost now. “Those families staring at the prospect of VAT on already high private school fees are in a very difficult financial position, especially as places are scarce at many state schools this September. 

“Most will be reluctant to pull a child out of a school, disrupting friendships and if key exams are on the horizon. But it is vital to face up to the challenge and make a plan.”

Many private schools offer pay-in-advance schemes, enabling parents to pay for a few years upfront if they are able to do so. This could allow them to avoid the future imposition of VAT. 

However, Hollands warns that there is a risk the government could amend the legislation surrounding VAT “so it becomes liable when a service is delivered rather than when it is invoiced. This means parents who pay-in-advance could still end up being landed with a VAT bill later on.”

Having said that, there can still be some benefit to paying in advance, as it may help secure a discount or protect against fee inflation.

Hollands adds: “It would be prudent to prepare for the financial hit in other ways, such as making economies elsewhere if necessary, even downsizing your home or having a frank discussion with grandparents or other family members to see if they can help out.”

Lifetime gifts to help cover school fees can reduce an eventual inheritance tax bill on an estate, so this could be an option to consider for wealthier grandparents with sufficient assets to gift - providing they do not jeopardise their own financial security.

We have more information in Private school fees: how to plan financially.

Ruth Emery
Contributing editor

Ruth is an award-winning financial journalist with more than 15 years' experience of working on national newspapers, websites and specialist magazines.

She is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. 

A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. 

Outside of work, she is a mum to two young children, while also serving as a magistrate and an NHS volunteer.