The Wire: Autumn 2019 – So you think that Brexit is the biggest threat to your financial wellbeing? With a General Election now on the cards, there could be a bigger threat looming

So you think that Brexit is the biggest threat to your financial wellbeing? With a General Election now on the cards, there could be a bigger threat looming

It’s often said that those in the media (and TV in particular) should avoid working with children and animals. Those of a certain age will remember the late John Noakes of “Blue Peter” fame demonstrating this rather well on live TV with some help from a baby elephant. If you’ve no idea what I’m talking about, find the clip on You Tube and you will see what I mean. If nothing else, it will provide some light relief from the rest of this article.

The equivalent in the world of wealth management is politics. One can never know what the politics of an individual client might be and so steering clear of saying anything which might, however well intentioned, cause offence is generally a very good idea.

However, from time to time, politics becomes so relevant to financial planning that simply avoiding talking about it is not consistent with ensuring that clients are properly informed about serious threats to their personal wealth. At times like these, where potential political developments represent what we consider to be the biggest threat to individual prosperity, our duty of care for our clients trumps our preference to shy away from politics and so, with apologies in advance to any ardent Corbynistas who may read this note, it falls to me to try to tackle this tricky subject head on. Here goes… 

With virtually no media coverage of anything else, you’d be forgiven for believing that the most significant (if not the only) clear and present threat to the economic wellbeing of the UK is a ‘no deal’ Brexit.

However, if you buy the argument that Brexit is a symptom of a broader divide in the relationship between the political establishment and the people rather than the cause of that divide (the rise of populist political parties here and in Europe, and the election of Donald Trump in the US support this theory), I’d suggest focusing some attention on a prospect that would dwarf the economic impact of even the hardest of Brexits

The possibility of a Labour government

Though bookmakers and pollsters see a Labour majority at the next general election as a relatively unlikely prospect, the possibility of the UK being subjected to a government led by unrepentant revolutionary Marxists is nonetheless higher than it has ever been. 

This is fuelled by a combination of the damage done to people’s faith in the free market economic model by the 2008 financial crisis, a substantial fall in the number of people able to accrue personal capital through buying a home, and the simple fact that anyone under the age of 40 simply hasn’t experienced a ruinous interventionalist economic policy. 

To be fair to Jeremy Corbyn, he has made no bones about the radical approach a Labour government would adopt, most recently likening it to a fundamental policy shift as Clement Attlee’s post-war government of 1945 or Margaret Thatcher’s in 1979.

Despite this not getting the coverage it might if we did not have a Brexit-obsessed media, there is evidence that people are aware of the threat and are taking steps to mitigate its potential effect on their personal wealth. 

In addition to our own experience of this, other professional advisers engaged with high net worth individuals and families are reporting activity aimed at ensuring that assets are not ‘trapped’ in the UK taxation net, should voters return a Labour majority at the next election. 

So, what are they doing and why? To understand this, we first need to understand what happens when a government seeks to exert substantial control over a free market economy.

Tax rises and the restrictions on the movement of capital overseas

Leaving aside the long-term impact of making the UK a fundamentally unattractive place for wealth creators to locate, the immediate problem for a future Chancellor McDonnell, is that the huge increase in spending he intends to implement (including a substantial renationalisation programme) is very expensive. Since post-2008 government debt levels remain high, most of the revenue required will need to come from increased taxation. 

Furthermore, given that the programme is driven by a genuine desire to achieve a meaningful redistribution of wealth, the key personal tax increases will need to be focused on income, capital and inheritance, rather than consumption. Indeed, Labour has already hinted at the introduction of a wealth tax on top of promises to increase Income Tax rates for higher earners as well as its natural dislike of inherited wealth. 

Unfortunately (from McDonnell’s perspective), as Arthur Laffer famously illustrated with his “curve” over forty years ago, the more you try to increase tax in a free society, the less you actually raise as people seek to avoid it. 

In a global market, a simple way to do this would be to move one’s capital (and possible oneself) overseas. This explains the tendency for extreme interventionalist governments to limit the movement of capital (and, in some cases, people). While there is no suggestion that Labour would seek to impose Soviet style restrictions on personal travel, some limitation to the movement of capital outside of the scope of UK taxation via capital controls should be expected. 

Capital controls can take different forms: for example, restricting currency exchange or by placing restrictions on the sale and purchase of overseas assets and investments. In essence, though, they seek to ensure that as much wealth remains within the scope of taxation, since prohibiting a flight of capital to a more reasonable jurisdiction is essential when your tax treatment of highly mobile wealth creators is demonstrably uncompetitive. 

So, while an incoming Labour administration could take its time over implementing changes to the UK tax system itself, the introduction of capital controls would be likely to be implemented swiftly.

What clients are considering

McDonnell’s insistence that such controls would not be required is not convincing many wealthy families and individuals, especially those who are internationally mobile, and they are starting to consider the following:

  • Moving assets out of the UK/Sterling. For liquid capital, this can be achieved by arranging custody in an overseas jurisdiction (with some careful thought regarding the investment structure concerned). In addition to our own experience, a number of wealth managers and private banks are reporting an increase in the number of UK residents opening overseas accounts for this reason. 
  • Establishing a trust, located overseas, for the benefit of family members. 
  • Accelerating family succession planning by making gifts to family members or family trusts now, especially where the recipients are non-UK domiciled individuals/entities. 
  • Leaving the UK: though clearly a drastic option for many, severing ties with the UK, especially for non-domiciled individuals and families who may not consider the UK as their permanent future home, would certainly be effective. 
  • For those currently residing outside the UK, they may defer returning for the time being.

The difficulty in determining an appropriate course of action is that, while the implications of a Labour government are clearly significant, the probability of that (currently at least) remains relatively low. 

Much rests on whether Boris Johnson can recapture votes the Conservatives appear to have lost to the Brexit Party, a tricky thing to predict amidst the current Westminster turmoil. Nevertheless if, as current polling suggests, the SNP retains the votes it has taken from Labour in Scotland and pro-Remain voters in the South are attracted to the clear pro-EU message of the Liberal Democrats, there is little evidence that Corbyn can capture enough votes to gain the majority he needs to implement his agenda. 

Of course, despite the Conservatives appearing to be gearing up for an election, none has yet been called. And, when it is, there will be the weeks of campaigning during which, for most people, there will be time to act provided they have a plan in mind. 

The best course of action at this stage would therefore seem to be to consider one’s options carefully ahead of time and determine the most appropriate course to take now in readiness for executing that plan if need be. 

Your HFMC Wealth adviser will be happy to develop an individual contingency strategy with you.

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