In an unexpected move that caught even his own party off guard, this week Prime Minister Rishi Sunak announced that the general election will now be held on the 4th of July. The decision, announced without warning, sent ripples through the political world and left politicians on both sides of the spectrum scrambling.
While Sunak cited the need for a new mandate to complete his economic agenda, critics accuse him of political opportunism. Either way, with Labour miles ahead in the polls, many will see it as one last roll of the dice by a beleaguered Prime Minister. As the campaign kicks off and tour buses are fired up, one thing is clear: that the Tories face an uphill struggle if they are to remain in Number 10.
So, with a change of government in July looking like a distinct possibility, what might be the impact on our investments and our finances?
Please note this bulletin is for general information purposes only and should not be considered personal financial advice. Investments carry risk and you may get back less than you invest. Past performance is not a guide to future performance and the value of investments may fall as well as rise.
It’s certainly been a tumultuous few years for Rishi Sunak. He enjoyed a meteoric rise to fame during the COVID-19 pandemic, due to his decisive actions as Chancellor of the Exchequer. As the UK grappled with unprecedented economic challenges, he implemented a series of radical measures to support businesses and workers. His furlough scheme in particular, was widely praised for protecting millions of jobs. Regular video updates, in which he clearly explained complex economic policies in an approachable way, helped him connect with the public. By autumn 2020, he was consistently topping polls as the most popular politician in the country.
However, since the peak of his popularity, Sunak's star has fallen significantly. The economic aftermath of the pandemic has had a significant impact on people’s personal finances, with a spike in inflation hitting every household and painful tax hikes for middle and higher earners. Revelations meanwhile about his wife's tax status and his own retention of a US green card did not do any favours for his public image. Then there was the Partygate scandal, in which Sunak was fined for attending a lockdown-breaking party, further damaging his reputation.
Conversely, after a rocky start, Keir Starmer's popularity has been on the up-and-up in recent years. Initially, his appointment as Labour leader was met with scepticism, by both the public, and the more left-leaning elements of his own party, who felt he was too centrist. Some even went as far as to call him a ‘Red Tory’. However, it could be argued that it was precisely a move toward the centre by the Labour party, that led to Tony Blair’s landslide victory back in 1997; the last time a Labour government ousted the Conservatives. Starmer has taken significant steps to rebrand the party, distancing it from the Corbyn era and embracing a more patriotic, pro-business stance.
Whilst they’ve been wrong plenty of times before, the latest voter intention polls certainly paint a pretty stark picture…
Impact of a Change of Government on Investments
Whilst a Labour victory would certainly bring change to the political landscape in the UK, it’s worth bearing in mind that that election results often have a limited impact on investment markets.
Whilst it’s true that markets hate uncertainty, they also have an uncanny way of adapting quickly to new information. Overall, the actual impact on investment markets of a change of government is often muted. Think back to the Brexit vote or Trump's 2016 win – both led to brief market jitters, but ultimately, equities continued their upward march.
A recent exception, of course, was the Truss-Kwarteng mini-budget debacle, which sent bond markets into a tailspin for a short period. But such extreme policy missteps are the exception, not the rule. Generally, investors focus on fundamentals like economic growth, interest rates, and corporate earnings – not the colour of the party in power.
It’s also worth noting that your investment portfolio invests globally, with only a relatively small exposure to UK stock markets and bond markets. This means that even if the election was to move UK markets in the short-term, the impact on your portfolio would likely be insignificant overall.
The Potential Impact of Future Tax Policy
While the UK election is unlikley to materially impact our investments, it could lead to some significant changes in tax policy. In practice this is what is likely to have more of an impact on our finances. Depending on the outcome, we could see shifts in capital gains tax, income tax, or inheritance tax.
Whilst historically Labour have been associated with higher taxes, it’s worth noting that overall, taxation has increased substantially under the incumbent Conservative party during the last ten years. Hikes to corporation tax and dividend taxation hit SME business owners especially hard, whilst freezes to income tax and IHT thresholds have seen record numbers of people entering higher rate tax, and bumper receipts from estates. Whilst Chancellor Jeremy Hunt has hinted at tax cuts being on the agenda if the Tory party were to remain in power, so far the details have been sparse.
So far, Labour have announced their intention to keep income tax rates unchanged, whilst focussing on raising revenue through higher taxes on corporations and the wealthiest individuals. Quite who falls into this bracket is left somewhat ambiguous, but they have announced that they would abolish non-domicile tax status, which currently allows some UK residents to limit their tax liability on overseas income. That said, the Conservatives have made similar announcements on this point.
One area of tax that does look exposed, is that of capital gains tax. Currently, most investors pay ‘CGT’ on investments at a rate of 20%, with the rate on gains on residential property set at 28%. Clearly this is some way short of higher rate income tax rates. Could a future government make changes here? Time will tell.
