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The Investor's Bookshelf

Would your finances survive Corbygeddon?

There’s talk of a National Maximum Wage — and a new wealth tax wouldn’t be much of a surprise

2 December 2017

9:00 AM

2 December 2017

9:00 AM

It is, I’m afraid, time to prepare your personal finances for Jeremy Corbyn. The near-collapse of Theresa May’s well-meaning but inept government means its replacement by a neo-socialist Labour regime is a high-enough risk that not to prepare for it would be reckless.

The first thing to note is that whatever you do, do it quickly. John McDonnell has said that Labour wants to ‘hit the ground running’ with immediate tax rises and sweeping changes to employment legislation, and nationalisation proposals ‘all on the shelf’.

Think first about your income and savings. That income tax will rise — for ‘the rich’ at least — is more or less certain. There may be a new band at £70,000 or £80,000 and the current higher-rate percentage is bound to rise. So review your spending. Cut where you can and prepare to live on less. There has been talk of a National Maximum Wage and it seems unlikely that many multi-million-pound pay packets will last long

Next, think about getting rid of buy-to-let investments. The current government hasn’t exactly been kind to landlords, but socialism has a long history of loathing them, and Corbyn has already proposed rent controls — something that I suspect will be the last straw for the finances of many small landlords. It wouldn’t be much of a surprise to see a new annual wealth tax of some kind imposed on holiday and rental properties. Now is as good a time as any to sell up.

You might also fix the mortgage on your primary residence if you haven’t already. Back in October it came out that Labour had been wargaming for a proper run on the pound. That’s far from certain — today’s markets are remarkably forgiving and a new Labour government could start more carefully than Momentum might hope. But, if it happens, it could mean rising inflation at exactly the same time as huge (and unfunded) public spending promises will be freaking out international bond investors about the UK’s creditworthiness. Interest rates will rise. Mortgage rates will rise with them.

Next look to your savings, both in terms of the structures you keep them in and the asset classes you hold. I’m not worried about Isas. These haven’t quite gained the religious status of the NHS in the British psyche but they aren’t far off. Your pension is a different matter. If you have cash left over after your Isas are filled, contribute to your pension sooner rather than later.

Then look at how you invest. The last time the pound fell sharply (after the referendum) the FTSE 100 rose nicely in response — a low pound makes it easier for our big exporters to sell abroad. That may not happen next time. Rising sales are likely to be quickly offset by rising regulation, nationalisation and taxation. Corbyn has already said that the ‘richest corporations’ will be paying a lot more tax. All this suggests that you need to be invested internationally even more than usual. I favour the Japanese equity market, but any equities outside the UK will help. Make sure that your portfolio is one you fancy for the long term: McDonnell has promised new taxes on financial transactions, so you could find it more expensive to get out than it was to get in.

Next, think about the consequences of a run on the pound. Labour’s wargaming will have involved talking about systems to prevent money leaving the country and stop complete currency collapse (socialists always blame financiers for pushing down currencies, rather than their own policies). Not many people remember these from the 1970s. Those who do will recall that being able to take only £50 out of the country was rather limiting. Say goodbye to gap years, cocktails in Dubrovnik and Christmas shopping in New York.

You can hedge against the first stage of a weak pound with a stash of foreign currency on a currency card (try Caxton) or on account with a foreign exchange broker (Caxton again). Otherwise, you can open a foreign exchange account with most of the main banks.

Finally, if you were thinking of a tax avoidance scheme or tax haven, maybe don’t. Corbyn’s reaction to the Paradise Papers doesn’t suggest he’ll be looking kindly on your attempts to optimise your tax affairs.

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