Irregular Roundup, 2nd October 2024

We begin today’s Irregular Roundup with Labour’s tax plans.

Labour watch

I wonder if Labour will come to regret:

1. ruling out increases to income tax, NICs and VAT (ie. the main taxes) in their manifesto
2. allowing a three-month gap between the election and the budget

I’m certainly beginning to regret the endless speculation that it has led to.

I understand that they have a huge majority (if not a real mandate in terms of votes) and so they might not care what anyone thinks. Still, it’s increasingly hard to square what they said before the vote (pro-growth, pro-business, pro-capital markets, anti-tax rises) with what they have said since.

The Spectator noted that the public sector pay rises are more expensive than the media are reporting – doctors and nurses have a 24% pension uplift, and teachers get 29% (whereas the mandated private sector minimum for auto-enrolment remains at just 8%).

• Growth will require productivity improvements, which in turn means job losses (and the unlikely prospect of Labour taking on the unions).

We have a lot of people on benefits, and a lot more in low-value, low-wage jobs.

• Higher taxes won’t fix either of these problems.

Since my last update we’ve had:

• Starmer warning us that the budget will be painful because of a “black hole” in taxes (despite record revenue and tax share)

Things are worse than we ever imagined. Frankly – things will get worse before we get better. Those with the broadest shoulders should bear the heavier burden.

• Rayner saying that workers will be able to demand four-day weeks
• The Leader of the House (Lucy Powell, if you care) insisting that without the means-testing of the pensioner winter fuel allowance, there would have been a run on the pound.

If we hadn’t taken that action we’d have seen a run on the pound, the economy crashing and the people who pay the heaviest price for that are the poorest, including pensionersand those on fixed incomes. That stability is really important for living standards.

In addition, we shouldn’t ignore:

1. the likely ban on smoking in a pub garden (balanced in part by a potential ban on disposable vapes),
   • this will be difficult to enforce, and sounds like the thin end of the wedge in state control of risk-taking
2. warnings that pubs should also expect to see minimum alcohol pricing during this parliament
3. Starmer’s churlish removal of a Thatcher portrait, and
4. Lammy’s withdrawal of export licences for defence sales to Israel

I know they haven’t had a party with cake in the grounds of number ten, but they look like clowns to me.

There isn’t space to look at all the articles in detail, so I’ll summarise the speculation around the potential tax changes, and their impact on the economy (particularly investment and the behaviour of those “broad-shouldered” people who will bear the impact).

The potential tax rises:

1. Equalising CGT rates with marginal income tax rates
   • This ought to require the reintroduction of indexation relief since inflation contributes so much towards “gains”
   • The lower rate of CGT and the annual tax-free allowance were brought in to replace indexation when it was abolished.
   • The increase also might not raise too much money since some people will delay crystallisation events, and others will have already brought them forward (see below).
   • The cost of this would be a reduction in risk-taking and enterprise generally – not really a growth agenda.
2. Lowering the tax relief on pension contributions (including employer contributions)
   • I’ll be doing some serious calculations on this if it happens, but I suspect the relief would have to remain at around 30% for higher earners to bother with pensions.
   • 20% relief on the way in and 20% tax on the way out might be outweighed by the long lock-up period, particularly if the tax-free lump sum is removed (see next point)
3. Reduce the tax-free lump sum from pensions (to £100K, or perhaps to zero)
4. NICs on pensions (perhaps with an annual allowance for small pensions)
   • I think that in spirit this might count as a counter-manifesto rise in NICs.
5. Employer pension contributions subject to (employer) NICs
6. Add NICs to property rental income
7. Possibly NICs on salaries of those who have already reached state pension age
8. Subject pensions to IHT
9. Remove the residence relief IHT exemption (though this would not be popular)
10. Remove the business assets relief from IHT (perhaps just on AIM shares)
11. We might also get the abolition of the “no CGT on death” rule, by which inherited assets are rebased to their market price on date of death.
    • There are two options here: (1) the estate pays CGT on gains or (2) the inheritor receives the asset with the original cost price, deferring tax on the gains so far.
12. And we might get a gifts tax, either over an annual limit for the giver, or perhaps a lifetime limit for the receiver.
13. Abolish the entrepreneur’s relief (now called Business Asset Disposal Relief)
14. Employer pension contributions treated as a benefit in kind
    • That feels like an income tax rise in spirit, and would make pensions a lot less popular
15. Reintroduce the pensions LTA
16. Means-testing the state pension
    • I’m not sure they could get away with a retrospective version of this – pensions are deferred rights/income from employment, and difficult to cancel.
    • A full state pension is worth around £250K (would cost around £250K to replace) – losing that would make a hole in most people’s retirement plans.
    • Even if they went with a phased implementation, administering rules around asset values or even income could be tough.
17. Some type of property tax reform
    • We could get an extra band of council tax at the top end
    • We could get a flat percentage council tax rate (though this would create serious cashflow issues for property-rich cash-poor (old) people in the south (where property prices are much higher).
    • I doubt we will see a land tax right away
18. And I suppose since it’s Labour we can’t rule out some form of wealth tax, though that would also create cashflow problems and wealth taxes have a bad track record of raising money.

There are a lot of implementation issues here generally on pensions:

• • Pensions are a hot topic in the public sector (where pensions are large) and upsetting the doctors might be counter-productive.
  • Taxing DB contributions as a benefit in kind creates cashflow issues for the recipients

One change which is not strictly a tax rise is the abolition of the British ISA. This is not a massive shock as:

1. there would have been implementation issues (lots of UK-listed stocks and ITs and ETs provide foreign exposure) and
2. I doubt that Labour wants to increase the annual allowances into tax-shelters.

I in turn don’t want to increase my exposure to the declining UK market. The government’s spin on this was:

We are not planning to complicate the Isa landscape even further.

The potential impacts mostly revolve around scaring away rich people and their capital.

• The Telegraph warned that top earners and entrepreneurs are already “fleeing Britain” in anticipation of CGT and IHT rises.
• Italy, Dubai and Switzerland are apparently the top destinations, with Spain and Monaco also popular.
• A wealth tax or significant property tax would only make things worse.

I think there’s also the possibility of a repeat of the “brain drain” we saw in the 1970s and 1980s, where talented people moved abroad to avoid high taxes.

• If I were a high-earning thirty-something, I would be thinking about it.

There are also reports that business owners, property investors and shareholders with taxable accounts (not to mention crypto bros) are rushing through sales in advance of the anticipated higher rates of CGT.

Quick links

I have six for you this week:

1. Discipline Funds wrote about The Most Insulting Economic Narrative
2. And about the Fed going 50 basis points
3. ThinkAdvisor said that State Street Launches ETFs for Building Bond Ladders
4. WealthManagement said that Retail Investors Won on Fees But Are Losing on Risk
5. Aswath Damoradan asked Fed up with Fed Talk? Fact-checking Central Banking Fairy Tales!
6. Alpha Architect looked at a Data-driven Approach to Clustering Similar Macroeconomic Regimes

Until next time.

Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London.

He has been managing his own money for 40 years, with some success.