Five ways to shield your money from a Labour government

The Autumn Statement was one of the last chances for the Conservatives to win back voters in time for the next general election. 

Jeremy Hunt on Wednesday announced tax cuts for 29 million workers, as well as the biggest tax break for businesses in 50 years. 

But it still might not have been enough to turn the tide for the Conservative party. If an election was called today, 46pc of the country would vote Labour and only 25pc for the Tories, according to the latest Ipsos survey. 

Shadow Chancellor Rachel Reeves said after Mr Hunt’s speech that the Tories’ time is up.

“They have held back growth, crashed our economy, increased debt, trashed our public services, left businesses out in the cold, and made life harder for working people.

“Our country cannot afford five more years of the Conservatives.”

But many among Britain’s middle classes are more concerned about what a Labour win at the next election – which must take place before January 2025 – would mean for their money.

Labour leader Sir Keir Starmer has ruled out explicit wealth taxes, however his proposals to scrap the “non-dom” status, add levies to private schools and reimpose limits on pension savings have fuelled fears that many could see a rise in taxes and other costs. 

Here are the actions you could consider taking to protect your wealth from a Labour government.

1. Protect your pension

In the March 2023 Budget, and following a long Telegraph Money campaign, Chancellor Jeremy Hunt made the shock decision to abolish the lifetime allowance (LTA), a tax charge on pensions worth more than £1.073m. 

Labour was quick to condemn the move, calling it a “tax cut for the rich”, and promised to reinstate the LTA if it won the next general election.

Around 250,000 people aged 55 to 64 could have an LTA issue if it is reintroduced at its previous level of £1.073m, according to estimates by pensions consultants LCP.  

Previously, savings over the limit were taxed at 55pc if the money was taken as a lump sum or 25pc plus income tax if taken out gradually. 

But reversing the change is far easier said than done, especially now that HMRC has confirmed the scrapping of the LTA in a policy paper published on Wednesday.

Rachel Vahey, of stockbroker AJ Bell, said: “Passing legislation to abolish the lifetime allowance altogether makes it far more difficult for policymakers to reverse the rules again, as Labour has pledged.”

Sir Steve Webb of LCP, a former pensions minister, has warned that reinstating the LTA is “fraught with difficulty” for a number of reasons.

For one, bringing back the cap on pension saving risks driving senior doctors to retire just before the election. A key reason for scrapping the LTA was to stop highly paid NHS doctors from retiring early to avoid tax bills.

There could also be “a flurry” of savers rushing to draw their pension in the run-up to the election, Sir Steve said.

To stop a flood of workers from retiring early, Labour could still decide to row back on its promise. As a result, Steven Cameron, of pensions firm Aegon, said: “Making predictions around the pensions lifetime allowance is extremely difficult.”

This has left savers with large pension pots facing a huge amount of uncertainty. Should they make the most of today’s generous pension rules, or err on the side of caution in case Labour pulls the rug out from underneath their feet? 

Fortunately, even if the cap is reintroduced, savers who have made the most out of Mr Hunt’s rule change may still be able to protect their pension pot.

Since it was created in 2006, the lifetime allowance has been changed multiple times. In response, HMRC has introduced protections so those over the new limit could claim the old, higher limit. 

Arguably, you should still seek to grow your pension as much as possible while the generous tax rules are in place.

Ms Vahey said Wednesday’s confirmation that the LTA will be cut means “those who feared hitting the lifetime allowance can resume contributions and keep building their pension pot”. 

Tax relief makes saving into a pension very attractive, as any investment returns made in your fund will be free of capital gains tax and dividend tax. 

As well as scrapping the LTA, Mr Hunt increased the annual allowance from £40,000 to £60,000 in the last Budget, allowing higher-earners to save large sums into their pension tax-free every year. 

Some savers may be tempted to crystallise their pension early in case a tax charge is reintroduced, but you should be cautious about drawing your pension unless you really need to. Crystallising a lump sum, and taking it out of a pension, brings this money into the scope of inheritance tax. 

2. Consider selling assets to avoid capital gains tax

An attack on capital gains tax rates could be on the cards if Labour gets into power, despite the party’s claims. 

Capital gains tax receipts have been skyrocketing as landlords and company owners sell up, hitting a record £18bn in 2022-23. The Conservatives have already dramatically scaled back relief given to sales and payouts that incur capital gains and dividend taxes.

But under a Labour government, the tax take could grow ever bigger, accountants fear.

In 2022, the Office of Tax Simplification, a now disbanded quango, called for the rates to be aligned with income tax rates in order to close the gap between earned and unearned income. 

Currently, basic-rate taxpayers pay 18pc on their profits from the sale of a second home and 10pc for shares while higher-rate taxpayers pay 28pc and 20pc. 

Earlier this year, shadow chancellor Rachel Reeves said Labour had no plans to increase capital gains tax. But tax experts have said for years that a future government may find it too difficult to resist.

However, Aysha Marley, of RSM, said: “Ms Reeves may find it difficult to justify such a low rate of tax for wealthier individuals and rumours abound that she would consider lowering or even abolishing business asset disposal relief.” 

“Business asset disposal relief” grants business owners a low 10pc rate on the first £1m of gains realised on the sale of a business. 

To take advantage of today’s low rates, those sitting on large capital gains may want to consider selling up ahead of the next election. 

Doing this before April 2024 – when the capital gains tax allowance, currently £6,000, halves to £3,000 – would save a higher-rate taxpayer with £50,000 worth of property gains more than £1,000 in tax. 

If Labour then aligned rates with income tax, but kept the allowance the same, the tax owed would be £18,800, as opposed to £12,320 today. 

Giving assets to family members who are basic-rate taxpayers is one way to avoid paying capital gains tax at the higher rates of 20pc and 28pc. 

“Alternatively, taxpayers might prefer to hang on to assets for longer and avoid realising gains or generating any liability at all,” said Ms Marley. “Once a taxpayer dies, capital gains are currently washed from their assets in the form of a ‘tax free uplift’ in the ‘base cost’ of those assets. In some circumstances, individuals will therefore prefer to hold onto assets until their death.”

3. Plan for private school fee rises

With a Labour victory looming, one of the biggest concerns for many middle-class parents is the prospect of rising private school fees. 

Sir Keir has said if he becomes prime minister he will slap private schools with 20pc VAT in his first year.

The Labour leader previously planned to strip private schools of their charitable status, but he has since backed down on this after the legal complexities became clear. 

However, the U-turn may make Sir Keir “even more determined” to push ahead with the VAT proposals, said James Ward, of law firm Kingsley Napley. 

This leaves parents facing a possible 20pc jump in fees. According to the Independent Schools Council, a trade body, the average day school fee is £16,656 per year while the average boarding school fee is around £39,000. A 20pc rise could therefore add tens of thousands of pounds to a family’s bills over the course of a child’s education. 

Mr Ward said the levy could also limit parents’ choice of smaller private schools.

“The biggest schools have got plenty of money and they’ll give bursaries to kids who can’t afford it. It’s the small private schools that will go under.”

Harry Bell, of wealth manager Charles Stanley, said: “Not all parents who send their children to private schools are sufficiently wealthy to wear this extra cost easily, leading to many scrutinising their spending and delaying big one off purchases.

“There is also a risk of parents sacrificing their retirement planning, such as pensions savings, in order to pay the fees, or even moving house to either release capital or be in an area with good state schools.

“Considering an intergenerational planning strategy to encourage wealth transfer from grandparents could help support any changes to private school fees.”

One option – if you can afford it – is to pay for your child’s education upfront. 

A number of schools offer “fees in advance” arrangements which could save parents potentially £60,000 in fees by allowing them to benefit from the current VAT exemption. 

However, this strategy is not foolproof, as Labour could still find a way to claw back the VAT from those who have already paid upfront, said Richard Holm of RSM. 

“Given that Labour have already indicated that they will consider blocking independent schools from reclaiming VAT on historic spend, introducing similar measures aimed at preventing prepayments is not out of the question.”

Nevertheless, paying in advance may still be worthwhile if you can afford it. Private schools will usually offer a discount to those who do. 

If this is not an option but if there are grandparents who can contribute, then encouraging them to transfer some of their wealth could help ease the burden. 

Transfers made for the education of children are free from inheritance tax – but only if made by the parent. So if you are asking a grandparent for a gift, remember it will need to fall outside the “seven-year window” before being free of inheritance tax.

Otherwise, grandparents could make gifts out of their surplus income to benefit from the little-used “unlimited gifting” rule that means the seven-year period will not apply. You can read up on the criteria for the “surplus income” rule here. 

4. Use inheritance tax reliefs 

Labour is reportedly considering scrapping two valuable inheritance tax exemptions – agricultural and business property relief – designed to let families pass on farms and businesses without paying the 40pc levy.

It is unclear whether Labour is mulling abolishing both exemptions in their entirety, or reforming them, but keeping protections for farmers in place.

If the reliefs are scrapped, then families could be forced to sell their businesses and farms in order to pay inheritance tax. 

Ms Marley said a move to tax family businesses could have “far reaching implications” for families and for the structure of wealth ownership in the UK. 

“Land or business owners who are fearful of the potential withdrawal of the relief may decide to give away land or shares in their family business to younger family members and we are already seeing some clients doing this in anticipation,” she said. 

5. Leave the UK or shelter assets to avoid higher taxes for non-doms

High earners have already been leaving Britain in large numbers, attracted by the lifestyle, high salaries – and low tax – of hubs like Dubai and America.

Labour plans to scrap the “non-domiciled” tax regime that lets wealthy individuals earn foreign income tax-free for up to 15 years. 

A study by academics at Warwick University and the London School of Economics has estimated that scrapping the non-dom status would save the Government at least £3.2bn a year. However, RSM has questioned whether it could generate extra revenue of this size. 

Over 55,000 UK residents claimed to be non-domiciled in 2022, according to the latest statistics from HMRC. Of those, 37,000 claimed the “remittance basis” which lets those with over £2,000 in foreign income exclude this from UK taxation. 

Wealthier non-doms who have been here for at least seven of the previous nine tax years will have to pay £30,000 as an annual remittance basis charge or £60,000 if they have been here for 12 of the last 14.

According to RSM, only 2,100 people pay the charge – suggesting that Labour would be relying on a relatively small number of taxpayers to raise the billions in revenue. 

Many worry that non-doms would simply leave the UK if the tax relief was abolished, taking their wealth with them. Mr Ward said: “If you have a substantial offshore income, the only thing you can do is either leave the UK or shelter that money in an offshore trust. Not only will we be losing hard-working people from our banking and legal sector, but also the hotels and restaurants where they spend their money.” 

The study estimates that fewer than 100 non-doms would move abroad as a result of the changes, but others are not so certain. 

Given the risk of an exodus, Labour is more likely to slash the window in which residents can claim non-dom status rather than scrap the relief outright, Mr Ward reckoned.

Moving to another country with a preferential tax regime for foreign workers is not the only way non-doms and others can avoid the higher tax bills. 

Investing for capital growth, rather than income, could bring assets out of the income tax regime and into capital gains tax. However, this strategy may not pay off if Labour does raise capital gains tax rates.

Sheltering investment portfolios in an offshore insurance bond could be a good idea for those who are confident they will become a basic-rate taxpayer or move to a low-tax jurisdiction later in life.

The income and gains of the bond are not taxed as they arise. However, you must plan your exit strategy carefully to avoid paying income tax on the bond at the higher rate.

Another option is to move assets into a “protected” trust, an offshore structure created by a non-UK domiciled settler.

However, Andrew Robins, of RSM, said: “It is possible that the concept of a protected trust could be abolished by a new government, and although we would expect existing arrangements to remain valid, this cannot be guaranteed.”

A spokesman for Labour said: “After thirteen years of economic failure under the Conservatives, working people are worse off with higher mortgage bills, higher taxes and prices still rising in the shops. Under the Conservatives, the tax burden is at a seventy-year high, with 25 Tory tax rises since 2019 alone.

“The Tories have become the party of high tax, because they are the party of low growth. Labour would get the economy growing again so we can boost wages, bring down bills and make working people in all parts of the country better off.”

Have you made financial decisions based on the prospect of a Labour government? We want to hear from you, email money@telegraph.co.uk