How to keep your money out of the clutches of Comrade Corbyn

LORD Sugar took time out last week from lambasting contestants in The Apprentice to state that if Jeremy Corbyn becomes the next Prime Minister, he will quit the UK.

While Sugar, once a big Labour Party donor, has the financial wherewithal to up sticks, it is not an option for most middle-class households who face a barrage of tax rises if Labour wins the next Election. So what can you do to protect your family?

Maximise pensions

THERE is little doubt that a Labour Government would abolish higher rate tax relief on pension contributions on the grounds that such a savings incentive benefits ‘the few, not the many’.

For the record, there are more than four million people who now pay 40 per cent income tax – hardly ‘few’. Indeed, there is an outside chance that Philip Hammond, the incumbent Chancellor, may even have axing the higher rate tax relief in his sights in just over three weeks’ time as a result of the Government’s pledge to invest an extra £20 billion in the National Health Service by 2023. Scrapping higher rate relief would be an easy target.

It is also not inconceivable that Labour would reduce the annual amount that can be invested into a pension and which is eligible for tax relief. This currently stands at £40,000 and includes any employer contributions made on your behalf.

WHAT TO DO: If you have any spare cash and are a higher rate taxpayer, you should direct as much money as you possibly can into a pension.

Indeed, for some who have already used this tax year’s annual allowance, they can take advantage of something called ‘carry forward’. This enables them to sweep up any unused pension allowances from the three previous tax years, starting with the earliest (so, the tax year starting April 6, 2015), and setting any of these contributions against this year’s income tax liability.

For big earners – £150,000 plus a year – their pension options are already restricted because of something called the tapered annual allowance. This reduces their annual allowance from £40,000 to £10,000 dependent on how much i ncome t hey earn above £150,000.

There are also contribution restrictions if you are aged 55 and over and have already taken advantage of ‘freedom’ rules (introduced in 2015) to access money from a pension.

Ned Francis, financial planning consultant at wealth manager James Hambro & Co, says: ‘The rules on pension contributions are fiendishly complicated and you have to be careful not to trigger traps. So if you are in a position to inject a lot into your pension take financial advice.’

It is not inconceivable that pensions could be hit by Labour in other ways – for example, through the introduction of a wealth tax or a clampdown on the amount of tax-free cash that can be drawn from a pension, currently set at 25 per cent.

But Alan Steel, chairman of financial adviser Alan Steel Asset Management, says investors should not be deterred. He says: ‘In the 1970s, Labour threatened a wealth tax, only to back off. I take comfort from the fact that if that tax had gone ahead, people’s main homes and their accumulated pension pots would have been exempt.

‘Of course, a Labour Government this time around may have a different idea but my advice is to maximi se your pension contributions sooner rather than later.’

Ring-fence from tax

ALTHOUGH it was Labour Chancellor Gordon Brown who launched taxfriendly Individual Savings Accounts in 1999, a radical Left-wing Labour Government could easily decide to clip their wings.

This could be done by either reducing the annual allowance – currently £20,000 – on the grounds that few investors take full advantage of it. Or by introducing a lifetime allow- ance similar to that already applying to pension pots – with any excess then subject to tax.

WHAT TO DO: As with pensions, you should seek to use your Isa allowance while it remains so generous. A family of four, for example, can protect as much as £48,520 a year within Isas – £20,000 per adult and £4,260 per child (in a so-called Junior Isa). For 16 and 17-year-olds, a quirk in the rules means they – or parents on their behalf – can contribute to both a Junior Isa and a cash (not investment) based Isa in the same tax year. So, a maximum £24,260 in the current tax year.

Bank capital gains

CURRENTLY, capital gains taxes are at their lowest rates throughout history. But that is unlikely to remain the case for long under a Labour Government with a ravenous appetite for taxing wealth.

Anyone realising gains in the current tax year is exempt from tax on the first £11,700 of profits – be it gains from shares, a second home or buy-to-let property.

Gains above this amount are taxed according to whether you are a basic (20 per cent) or higher/additional rate (40 or 45 per cent) taxpayer.

The rates are 10 and 20 per cent respectively – 18 and 28 per cent in the case of property sales that are not a person’s main home. Given Labour’s disdain for wealth, it would at the very least look to align capital gains tax rates with income tax rates.

WHAT TO DO: Anyone sitting on sizeable capital gains should consider crystallising some profits while tax rates are so favourable. The

£11,700 allowance this tax year cannot be rolled over into the next if not used – it is lost – so it is worth reviewing whether it is time to bank any profits.

If banking gains, you could then be shrewd and use them to fuel additional contributions into taxfriendly pensions and Isas, thereby potentially ri ng- f encing more assets from a future Labour Government. Under ‘bed and Isa’, it is possible to sell shares held outside an Isa – crystallising any capital gain – and then rebuy them inside the plan. Your overall investment portfolio remains the same but is slightly more tax efficient as a result. There will be charges, including 0.5 per cent stamp duty. TRANSFERRING assets between married couples and civil partners does not trigger any tax charges such as capital gains. As a result, it represents one of the simplest, but most effective, pieces of tax planning available. By moving assets to a partner who is paying a lower rate of tax, overall tax bills can be reduced – and the threat of Labour and higher income tax rates partially mitigated.

Jason Hollands, a director of wealth manager Tilney, says: ‘Transferring savings to a spouse is simple and with most banks can be done online or at a branch. Simi- larly, shares and investment funds can also be transferred, usually with little cost incurred.’

WHAT TO DO: Ensure family savings and investments are set up tax efficiently.

For example, if a higher rate taxpayer has £ 100,000 in a savings account paying a generous 1.3 per cent, they will earn interest this year of £1,300 – £500 of which will be tax free as a result of their personal savings allowance. This will result in a tax bill of £320 – 40 per cent of the £800 excess.

But if the higher rate taxpayer moved £65,000 of these savings into their spouse’s name, and they are a basic rate taxpayer, then the deposits would escape tax altogether.

This i s because t he £ 35,000 remaining with the higher rate taxpayer would generate interest of £455, within their tax-free savings allowance.

The basic rate taxpayer would receive £845, within their larger t ax- free savings allowance of £1,000.

The same strategy can prove effective on shares. Take for example a higher rate taxpayer who has a £ 100,000 investment portfolio which generates four per cent annual income – £4,000.

Under the current dividend tax regime, the first £2,000 is tax free with any surplus attracting tax at 32.5 per cent – so a £650 tax bill.

But if half of these investments are transferred to a spouse who pays basic rate tax, there is no tax. This is because both can use their tax free £ 2,000 annual dividend allowance to protect the income they receive – £2,000 – from tax.