Following weeks of intense campaigning, the electorate delivered its verdict. As widely expected, Sir Keir Starmer was elected as the new UK Prime Minister with the Labour Party forming a majority government, replacing the Conservative government after 14 years.

With their key message a promise of change, we will consider the market reaction to a Labour government and the possible impact on financial planning and investment management.

Market reaction

In the run-up to the election, the UK markets were reasonably stable, with a strong Labour victory predicted and investors hopeful of a pro-growth productivity-led agenda. As the markets opened following the results on 5 July, the FTSE 100 and FTSE 250 both opened up and sterling held steady after the exit polls came in on Thursday evening.

Very few events in UK politics, including general elections, have meaningfully moved markets longer term. From an investment markets standpoint, those with globally diversified portfolios may find that it matters little who won. Labour was widely expected to win, and since the results met these expectations, the markets have remained calm.

Analysts that we have spoken with do not believe that the 2024 general election will affect the financial markets significantly and it is interesting how little effect UK elections have had on portfolio performance historically.

Recap of key Labour manifesto pledges

Labour will need to build a robust, sustainable plan that ensures it meets its fiscal targets, which can only be done by cutting spending and/or raising taxes. Their manifesto stated “We will ensure taxes on working people are kept as low as possible. Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.” It listed its tax-raising plans of:

• reducing tax avoidance;
• revising non-domiciled taxation rules;
• levying VAT and business rates on independent schools;
• ending the Capital Gains Tax treatment of carried interest;
• a windfall tax on ‘oil and gas giants’; and
• increasing Stamp Duty Land Tax rates by one percentage point on residential property purchases by non-UK residents.

The manifesto additionally promised to cap Corporation Tax at 25% but was silent on Inheritance Tax (IHT) and Capital Gains Tax (CGT). This pair of capital taxes could feature in the next Budget, although HMRC’s own estimates suggest a sharp rise in CGT rates would be self-defeating because of ‘behavioural effects’, e.g. gains would just be left unrealised. However, a month before the election was called, the Institute for Fiscal Studies published a paper explaining how the closure of three IHT ‘loopholes’ could raise nearly £4 billion a year by 2029/30.

Labour promised to review the pensions landscape to ensure improved pension outcomes and greater investment in the UK markets, which may include a review of pension freedoms and the auto-enrolment system. They also pledged to retain the Triple Lock (the promise to increase the State Pension by the highest of either inflation, wage rises or 2.5%).

They were silent on a change in the Individual Savings Accounts (ISAs) landscape and the British ISA, which could lead to the demise of the latter. This would not allow a Conservative proposal of an additional £5,000 allowance on top of the current £20,000 ISA limit, designed to encourage increased investment in UK companies.

Rachel Reeves, the first female Chancellor, has suggested VAT on independent school fees will not be introduced before 2025 at the earliest, she told The Times’ CEO summit. “We’re not going to have a retrospective tax,” she said. “I don’t think that would be the right thing to do. So these changes would be in our first Budget, but they would come in after that, not retrospectively.”

The Parliamentary timetable

An early summer election has meant that the timing of when the new parliament can get down to work is contingent upon some basic realities of the Parliamentary and party calendars:

• The King’s Speech is scheduled for 17 July, which is part of the State Opening of Parliament, and no substantive parliamentary business can usually occur before this date. The Speech will show the government’s immediate priorities and be followed by six days of debate in the Commons.
• The dates for the Summer recess are to be confirmed (it was scheduled to commence on 23 July). Whenever the Commons does rise, it will probably return, as usual, in the first week of September.
• Historically, the House of Commons has taken a three or four-week recess in September/October to allow MPs to attend their party conferences. The LibDem Party’s conference runs from 14-17 September, Labour’s from 22-25 September and the Conservative’s from 29 September to 2 October. The new government will probably not want the House of Commons to be absent for so long.

In his speech on the steps of Downing Street on 5 July, Starmer said “the work of change begins immediately”. As the tricky summer timeline shows, there is limited Parliamentary time for the government to work with before 12 October. This date marks Labour’s first 100 days in office and in political folklore the period when a new government has the greatest political capital.

An Autumn Budget

Reeves ruled out an emergency Budget and has said she will give the Office for Budget Responsibility (OBR) the normal ten weeks’ notice to prepare an Economic and Fiscal Outlook ahead of her first Budget. However, over the weekend she requested an update from the Treasury on the UK’s financial position which will be presented to parliament by the end of this month. In announcing the review on Monday, Reeves added “difficult decisions” lay ahead.

In theory, the earliest Budget date could be Friday, 13 September, or 18 September if she keeps with the traditional Wednesday for Budget Day. Such a tight timeline is now thought to be unlikely for three reasons:

• The Labour Party’s Conference starts in Liverpool on 22 September;
• Reeves will want to make decisions on the next Spending Review, both in terms of its contents and whether it will cover the next three years from April 2025 (as originally scheduled) or be an interim review for just the coming year; and
• Jonathan Ashworth, the former Shadow Paymaster General and a key member of Reeves’ shadow Treasury team, lost his seat.

We’re here to help

It is essential to understand how the changes in government might affect you and your family’s circumstances. As usual, we will keep a close eye on developments likely to impact your personal finances over the coming months. The recent comments from Reeves indicate that changes will be made but that she is not in a rush and is not looking to apply changes retrospectively. We believe it is most likely that major changes will take effect next tax year, but it is possible that some changes could take effect from the date of the Budget.

If you have any questions about how the UK’s regulatory environment might affect your finances, please call 020 7444 4030 or email us.

 

The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information. Past performance is no guide to future returns. The above content does not represent a personal recommendation. Taxation will depend on your individual circumstances and may be subject to change.