What will Burnham's government mean for taxes?

0:12Welcome to the FT Advisor podcast with me, reporter Harold Mills. Tuesday the 21st of July marked Annie Burnham's first full day as Prime Minister of the United Kingdom. and while Burnham has presented his premiership as a circuit breaker, advisors up and down the country will doubtless be wondering what effect a new administration will have on their clients' hard-earned savings and investments. Thankfully, I'm sat with two experts who can put pay to the conjecture and bring some much-needed clarity. We are joined by Harry Woolman, Global Markets Associate at Financial Risk Management and Advisory Firm Validus, and Antonia Medlicut, Times Columnist and Founder and Managing Director at Financial Education Platform Investing Insiders.

0:51Welcome both to the podcast. Thanks for having us. Thank you. So, Harry, we'll start with you. Markets have had a little time to digest Burnham becoming Prime Minister. How have investors reacted? It's a tale of two halves, in my opinion. So, three or four weeks ago, or within the last three or four weeks, Andy Burnham's been as about as quiet as a Prime Minister-designate can be. He's not offered a lot. Therefore, markets have reacted in a relatively benign fashion. His leadership race was pretty much a foregone conclusion as well, which added to that benign narrative. If we hark back to three months ago, though, however, where it became clear that he was posturing for a leadership challenge, markets and investors began selling off UK assets in the hope, or in the fear, rather, that it signaled a change to the left-hand side of the political spectrum for the Labour leadership, ultimately increasing the prospects of fiscal largesse.

1:46and what effect has perhaps surprised the appointment of John Healy's chance yeah that's a that's a good one that caught most of us off guard I suspect so we're still kind of waiting and seeing how markets are reacting for the John Healy announcement I know last Friday for instance Shibana Mood it was reported that she was effectively a shoo-in for chancellorship UK assets rose on the back of that the pound for example rose to one year highs against the basket of currencies but John Healy's appointment is certainly from left field I think he was not in the top five of prospective candidates from bookmakers, from prediction markets.

2:20Given his defence background, he resigned from the last cabinet over a funding spat on defence, which is somewhat ironic given his position now, as of last night. We expect him to push for increase in defence spending. Now, what does that entail? Typically, usually it warrants higher borrowing and or higher taxation. So it'd be very interesting to see how that manifests in the coming weeks and months. And so Antonia, from a financial consumer standpoint, what do you think people are most worried about or perhaps excited about this week? And could potentially the appointment of Healy maybe reassure people?

2:54Well, I think what Harry just said about people, the higher taxation, that's obviously going to be the major worry for a lot of consumers. In particular, there have been a lot of rumours around bringing capital gains tax in line with income tax. so that's obviously a concern. I have spoken to a lot of households and a lot of people across social and one of the major concerns which was actually quite surprising was the fairer share proportional property tax. Andy Burnham has publicly backed that and it's all been costed and it's gone through a parliamentary committee So it's probably more than just a rumour at this point.

3:44It's on the table. And there are groups of people who are going to benefit from that. Farah's share themselves have said that it's likely that around 77 % of households are going to benefit from that kind of taxation system. however the surprise when talking to the public is that most people are quite against it there are several groups of people who won't benefit from that single people are going to lose their single person discount assets rich cash poor this has constantly been a concern for for many governments, or retired people who bought their properties many years ago and now wouldn't be able to pay that tax.

4:41There is a proposal to defer the tax for those kind of people, which could kick that can down the road. But that has been trialled in other countries and has proven to be very unpopular. People don't want to work and save for their entire lives and pay off a property only to compound a debt to the government instead of passing that on down to their children. So that's something to be aware of. Obviously, the other side of the coin is that there is some excitement at the prospect of getting rid of stamp duty. And that could make the property market a bit more fluid. and help people to, you know, older generations to downsize without that stamp duty cost.

5:35But, you know, there's always pros and cons with anything that's tabled. But what I would say is that my general feeling is that it was quite unpopular. So, Harry, actually, we'll come to you again. so Antonio's kind of mentioned the different sets of proposals for taxation but given the kind of the UK's position on debt deficit borrowing costs actually how much flexibility does Burnham have? It could be a very short answer this one the answer is not a lot if we frame it in with some figures and add some context there we look at UK's total debt so summing government debt household of debt and corporation debt, we're at 239 % of GDP, which is the highest in the G7.

6:20If we look at net debt to GDP, we're at 95 % as of May, and that is trending in the wrong direction. To cut the government some slack, there are a lot of external factors impacting sentiment, impacting higher inflation pricing, therefore impacting higher rate pricing, which of course makes their position all that tougher. That being said, though, comments from Andy Burnham last night where he said he was seeking out any flexibility to the UK's fiscal rules. It's debatable how much flexibility there is, full stop. But those comments saw long-end gilt yield spike by about seven or eight basis points to the highest levels in two months, which goes to set or stands to reason that every pound that he is committing, that his cabinet will commit, is going to be heavily scrutinised going forward.

7:04And what do you think that flexibility could entail then? who knows at this stage? I think it's so hard to say. I know he's speaking today on his plan to combat the cost of living crisis and how that will be funded. So I think after today, we'll have a lot more to discuss there. But from a flexibility standpoint, I think there's about£16 billion worth of headroom. If they're looking at abolishing things like stamp duty tax that Antonio alluded to, that's going to eat into that and going to have to be funded somehow. So Antonio, we'll come back to you. So Burnham has committed to honour the 2024 Labour Manifesto pledge on no raises to income tax, VAT and national insurance.

7:44That takes out a bulk of his taxation basis. Where else could some of the money? Million dollar question. Where is this money all going to come from? He's committed to keeping the triple lock. So that's a massive burden on the Treasury. And he's saying that he wants to help with the cost of living crisis. So he needs to pull those funds in from somewhere. There's obviously this talk of bringing capital gains tax in line with income tax. However, historically, we have seen that laugh a curve coming into effect when you do things like that, because Rachel Reeves did it in her last budget. And I think we took one point seven billion less in capital gains tax receipts as a result of that move.

8:34So it's a really difficult one. I wouldn't want to be in that job right now because finding that money is going to be the issue. There is talk of a new 10 % starting rate for low earners with a 50 % threshold for higher earners. Whether that creates much headroom, probably not because you're dropping the rate at the bottom end of that scale. The fairer share property tax, even by fairer shares own calculations, is probably going to just equalize and not raise any more. The 50p rate above 125 ,000 for earners. Again, that's that. I mean, people find ways of navigating these things. So rent freeze, there has been that.

9:36He said the bus fare cap, the green levies off energy bills, those aren't revenue raisers. Those are all, again, dipping into the Treasury and they're going to cost even more money. Do you think perhaps those changes that you've just muted perhaps are going to fulfill part of his promise to kind of ease the cost of living? Yeah, but they all have to be paid for somehow. and I'm not hearing anything coming through at the moment which plugs that gap. You know, there's this massive fiscal backhold that we're not sort of... I haven't seen anything that really addresses it. So kind of back to you, Harry, do you think it's going to be a case of, you know, Burnham and his new chancellor are going to be kind of looking down the back of the sofa for a little bit of money, say, on pensions, on ISAs, capital gains, property, because he obviously can't touch the big three now?

10:28Yeah, I guess that's the question people care about most, right, is whether any form of taxation rises are inevitable. And for me, the balanced probability feels skewed to more of a yes than a no for a lot of the reasons we've just discussed between the two of us. But we have to think as well, Keir Starmer, somewhat of a parting gift in many ways. One of his final policy acts was to implement a£15 billion defence bill, one third of which is going to have to be found within the next budget cycle too. So let's assume there's a£16 or£17 billion buffer at the moment for the government coffers. If we're leaning into£5 billion of that because of this defence bill, then we're back down to£10 billion.

11:09So to your question earlier about flexibility, not a great deal. There is some green shoots worth calling out. There was an upside growth surprise to UK GDP in May, albeit very, very small. But that's very encouraging given the backdrop of this escalatory spiral, given the conflict in the Middle East and those impacts on global supply chains. So definitely worth thinking about there and bearing in mind. There are mediators in the Middle East pitching for a resolution or at least a ceasefire to current affairs. Whether that's successful or not, of course, remains to be seen. But if that is reached, if a ceasefire or a peace deal is reached, then of course that will aid the taxation burden.

11:46And so back to you, Antonia. I know a lot of financial advisors responded very negatively to kind of recent changes to ISAs and that has been muted as a potential way that Burnham could increase his support, but equally that would potentially cost him money. What are your kind of thoughts on potentially rolling back on the ISA changes that were quite recent? Are you talking about the limited cash ISAs? I don't see that creating a lot of headroom for them because there are holes in that as well. People can put the money into a stocks and shares ISA and gain interest there. They only need to, I believe, invest 1 % of their portfolio in order to get those interest rates.

12:33So I don't see that creating a lot of headroom for them, to be honest. But cash-strapped investors, are they really able to put money in the ISA and take advantage of those allowances anyway, to any great extent? Yeah, exactly. that's a key point as well so there's the IHT on pension pots which is due to come in effect in 2027 we know that that's concrete that'll raise some revenue I suppose but how much who knows I haven't seen costings on that actually with frozen thresholds I think this morning there was a record for year on year and record for inheritance tax receipts. I think it was up 96 million on this quarter last year.

13:24And then with the frozen fresh shells, it's going to be, sorry, with pensions coming in, that's going to raise even more money. That doesn't surprise me. I mean, financial advisors and planners, that's where to concentrate. That's a real policy that's in place now and something that they can do something about. and so between now then and the next budget that will be a moment that Healy and Burnham are going to look towards as an opportunity to set their fiscal stool and raise revenue what would you be keeping an eye on and looking out for? Well the last time around they hit employers quite hard with an increase in NI contribution from an employer standpoint so how much more can they squeeze out of your small to medium enterprises?

14:14probably not a lot in the grand scheme of things. The UK economy, I alluded to, slight upsides pricing in growth. You're only going to eat into that if you increase taxation on those contributing more effectively. So, yeah, we'll kind of wait and see at this stage. And Antonia, from a consumer finance standpoint, what would you be keeping an eye on?

14:37His own advisors are telling him to look at the triple lock. He's pledging not to do that. at the same time that triple lock is going to be pulled into income tax as of next year. He's saying that he's going to look at the threshold for the personal allowance. And that goes in direct conflict with trying to raise funds for the Treasury. So I feel like that's on uneven ground at the moment. I think there may be some tinkering around the edges of pensions so whilst he's not coming out and sort of directly saying anything I think that that's where they'll look to raise some more money It's interesting what you say on the triple lock it's often viewed as a financial revenue raiser but then a vote loser in that you don't want to alienate that pension vote approaching an election It's political suicide and that's why no one will touch it.

15:40But I actually spoke to one of the people who was responsible for putting the triple lock in place and even he said, this is no longer sustainable in its current form. And the fact that it's going over the personal allowance, it doesn't make sense to tax a benefit. So it needs looking at probably. I mean, coming back to what Harry said about, actually there's not a huge kind of swathe of options to raise the revenue required, especially to meet that defence budget? Do you think this is something he could increase to become under pressure to change? And actually he might look at this and say this is an opportunity to be really bold and clear, especially looking at it from an intergenerational and wealth redistribution?

16:23He might have to. I mean, it's a difficult one. He'd have to go back on what he said. But the fact that so many of his own advisers are advising him to look at that specifically. And it would generate a lot of revenue. I mean, the triple lock is costing us something like 15 billion by 2030, above and beyond what it would have cost if it had just risen in line with wages. So there's a massive amount of money right there. Interesting, because that's actually not dissimilar to the numbers that are raised on inheritance tax, that's a meaningful amount of revenue. so from a financial advice perspective what conversations should advisors be having with clients right now um i think that um one of the massive issues that we had on the during the last budget was the amount of people who took action based on rumors and i'm specifically talking to people who took out their um tax-free lump sum and that was an irreversible thing that crystallised a major tax event.

17:30So I think advisors should be telling their clients not to make any panic moves based on speculation, because at this time, everything is really speculation. Very little is actually set in stone. But react to the things that we know are going to take place. So that IHT on pensions, for example, we know that that's coming. So plan for what's ahead, not for what's speculation. and is that similar from a for an investment perspective yeah from from the institutional standpoint i think it that stands to reason absolutely you kind of react to what is concrete but be prepared to act quickly i think is is something that we need to take away from this i suspect capital gains may come into kind under the microscope whatever form that may take if that does come to fruition i guess we'll have to wait and see but whether they increase that threshold, then perhaps that will warrant some extra eyeballs.

18:31But the UK is kind of stuck between this rock and hard place and wants to make themselves more investable. But if you increase the capital gains tax burden on prospective UK investors, it's kind of a cut off your nose to spite your face narrative. And so, Antonio, you mentioned one example there of people reacting to conjecture. What previous examples can you think of of savers and investors who have reacted to a major political event. I mean, back to your point on capital gains tax, I think we saw people selling off ahead of the last budget.

19:08I mean, this happens every time that there is speculation that people take these sort of panic reactions. And usually it doesn't quite work out. I mean, that one where they took their money out, the tax-free lump sum out of pensions. I think some people lost 55 % to 70 % on the back of that when they tried to put it back in because of the penalties. So it wasn't a small amount that people lost. I mean, I have seen some reports that actually the Treasury did quite well out of that action because that obviously raised revenue. so it didn't affect them negatively that all of this speculation took place and people reacted incorrectly.

19:58Do you think people were reacting because they hadn't spoken to their financial advisor they'd spoken to their financial advisor and then they did it anyway or they...

20:10Yes, I think that there is a lot of that. I think people look at the press and they look at what's going on there and they take action based on that. I did see some financial advisors writing in the press that they were taking out their lump sum. So that doesn't help. So it's... But I think if your financial advisor knows you and they know your current situation and things like that, that is going to be your safest route, is to take their advice. I suppose there's a follow, the natural follow-on to that is, what are you worried about people reacting to this time and what kind of conjecture have you seen materialized in people kind of scrambling to make decisions it's going to be that capital gains tax um and also the um the lvt and the uh fair share property tax um i've already spoken to people who are going gosh what are we going to do how are we going to navigate this um so people are already thinking about what actions they're going to take.

21:16But no Prime Minister steps into his role and rewrites a tax code on day one. And no Chancellor does that. They have to come in and they have to assess everything and people are going to be running in and out of their office with files and all of this sort of thing. So nothing will happen straight away. We know that the mansion tax is coming in. So that's one thing that you can react to now. But we don't know what they're going to reverse from the previous government, and we don't know what they're going to add in at this point. And do you think part of the problem is that Bernda maybe hasn't had enough time to kind of fully cement what he wants to do?

21:59And partly, as part of that, he's been working with his team, you know, as mayor of Manchester, but actually he hasn't had a full kind of civil service and team of advisors around him to fully kind of cement a vision for the country? Yeah, gosh, it's been quick. So yeah, I think that there's an element of that. There's obviously been very little communication so far from this government. And in a way, I was quite relieved to see that because I think all of that speculation that happened around last year's budget was quite damaging. And hats off to this government. They managed to keep things very quiet because that chancellor appointment came as a red herring to everyone really um so yeah i i probably there is an element of he's he's got to get his his legs under the table and assess everything properly and talk to his team and get a really solid plan together and we don't want sort of ideas flicked out that people can react negatively to i suppose that's one of the advantages of having a far smaller team they say he's got fewer people he can kind of lead to the press yes that's true yeah it's interesting is that kind of similar from a kind of markets and investor perspective yeah definitely he's he has a small team and yes as Antonio alluded to it's been hard to discern where policy is is heading but he has got some highly competent people who have effectively been there and done it for example Andy Haldane former chief economist of the Bank of England.

23:31So he's well advised and well backed up on with respect to things like economic policy. But from an investor standpoint, are they pivoting too much? No. Our typical client base and people we work with closely take a longer term view. It would be more that retail investor market that would be perhaps a little bit more fickle for want of a better term and seeking directionality to a greater extent. Great. Well, we're approaching running out of time. So I'm going to ask you both the Same question to end on. So one of you can have a bit more time to think than the other. If you could give one piece of advice to consumers over the coming months and one piece of advice to the new government and policy, what would they be?

24:11Harry, you first. Sure. So consumers, institutional investors, my point of view is it's going to get worse before it gets better, i.e. volatility is certainly going to remain high for UK assets. So until we have sight of a cogent plan from the government, both fiscal and domestic policy, kind of be prepared to act quickly and have an adequate risk management practices in place being in that business for the government this is our seventh prime minister since 2016 that's not that fact is not lost on anyone even burnham himself there are plenty lessons to draw from in that last decade make sure you learn from them otherwise we're going to be sat in this table again in the not too distant future having a similar discussion i look forward to it yeah I would watch for stamp duty council tax consultation being launched.

24:57So those tend to leak before they're confirmed. So that's one to watch out for. Let's see whether Healy's cautious opening tone holds when the budget comes. That shift is going to be the real signal. and don't forget about those confirmed dates on pension pots being pulled into IHT and the cash ISA cut. So yeah, I think that's what consumers should focus on right now. Okay, that's good advice for consumers. Well, two brilliant answers, which I hope will give listeners and advisors plenty to think about. I'm afraid that's all we've got time for today. Thank you both for coming in. Thank you very much.

25:44Thank you. Thank you to all our guests for listening. The FT Advisor podcast is going on its summer holiday and we'll be back on the 4th of September. Have a good summer.

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