The Conservative party may have cobbled together a government, but the strains are already starting to show. There has been much wrangling over the Queen's Speech, which has now squeaked through parliament.
Another general election looks possible within two years, and with it the election of a government more focused on wealth redistribution than any seen since the 1970s.
This isn't likely to be good news for investors. By its very nature, investment wealth tends to be the preserve of people with money to spare. These are an obvious target for a Labour government under Jeremy Corbyn.
The majority of tax-incentivised savings - ISAs, venture capital trusts (VCTs), pensions - could therefore be subject to change.
There is also the question of the public-private partnerships that support a number of the infrastructure investment trusts. How would they fair under a government with a renationalisation agenda?
While solar incentives have been cut, these and similar incentives that have formed the basis for various investment trust and VCT schemes must also be under threat from Labour's manifesto promise to "take energy back into public ownership to deliver renewable energy, affordability for consumers, and democratic control".
It should be said that there is no detail on this. The issue does not appear in the Labour manifesto and requests for detail from the Labour Party drew no response.
However, Huw Witty, partner at legal and professional services firm Gordon Dadds, says: "While there is no mention of anything to do with tax-incentivised savings in the manifesto document, it is difficult to see them existing under a Corbyn government."
Cuts to tax relief
While the investment industry may argue that these incentives help deal with the savings crisis, they are seen to benefit the wealthy disproportionately. The parties of the left and centre left are naturally sceptical of unearned wealth.
The Liberal Democrats, for example, promised to clamp down on tax dodging and to ensure that unearned income is taxed more aggressively than earned income. Labour has long been suspicious of expensive incentives for the wealthy.
With this in mind, pension tax relief looks like an obvious target. It is a big cost for the Exchequer: a recent House of Commons Briefing Paper estimated the annual cost of pension tax relief for the government was £21.2 billion (£34.2 billion in annual tax relief, less £13.0 billion of tax paid by pensioners).
There are reasons why this figure may not be entirely accurate - tax rates of individuals may change over time, for example - but, nevertheless, the costs are high.
In his time as Labour leader, Ed Miliband proposed cutting higher-rate tax relief and diverting the money towards lower tuition fees and it is likely that Corbyn would try something similar, either bringing rates of relief lower, or cutting the annual allowance.
Carol Knight, chief operations officer at the Tax-Incentivised Savings Association (TISA), says that reducing higher-rate tax allowances has been a persistent conversation between the investment industry and politicians.
ISAs may also be vulnerable: they are a popular product, with 12.7 million ISA accounts opened in the 2015/16 tax year and as such, there may be little appetite to abolish them.
The cost to the Exchequer is far cheaper as well. The cost of the tax relief for ISAs in 2015/16 was around £2.6 billion.
However, the £20,000 annual allowance is generous and may be cut back. There were threats to cut back the allowance under the Labour government in 2010 when it was only £10,200.
There is a perception that ISAs have become a way for those who have exhausted their pension reliefs to squirrel away more money in a tax-free environment.
VCT rule changes loom
VCTs could be under threat whatever the colour of the government, believes Ben Yearsley, director of Shore Financial Planning. He says: "The tax breaks are very attractive and the industry hasn't necessarily helped itself.
"Investments such as renewables shouldn't really have had the tax breaks they were given; they were too low risk. As such, VCT providers raised a lot of money while not necessarily directing money to early stage companies."
While this problem has been largely addressed (with tax incentives removed from many renewables projects) it may not have given the industry a strong negotiating hand.
Equally, Yearsley argues, there are questions over the efficacy of tax incentives. He says that any incoming government may look at Neil Woodford's Patient Capital Trust fundraising, which had no tax breaks attached and yet raised £800 million, and question whether tax breaks are necessary to direct capital to small businesses.
The Patient Capital Review, announced in November of last year, is looking at long-term funding for small businesses, its accessibility and the role of government. This may see the VCT rules changed.
They have already been subject to some adjustment - tax relief rates have changed, for example. Tax-free dividends might be under threat, or the upfront tax relief may fall.
The one positive for the VCT industry is that the tax breaks aren't expensive for the Exchequer (at around £160 million) and, as such, it may continue to evade the long hand of government.
Key to all of this is the extent to which tax reliefs incentivise savings. Knight says this is not entirely clear-cut: "People don't always understand tax incentives. They don't understand the benefit of a 20% tax relief, or even that there is no benefit for a non-taxpayer.
"We find that people respond more easily to the idea of matching. That's why initiatives such as help-to-buy have been popular.
"It is the investment equivalent of buy-one-get-one-free and that is a familiar concept. We believe we need to structure the savings regime to use terminology that gets the best results."
There may also be concerns for some specialist investment trusts. For some, their investment strategy relies on public/private partnerships and private investment in infrastructure, none of which would appear to sit well with a government keen to renationalise.
The Labour party plans to fund infrastructure development through a National Transformation Fund that will invest £250 billion over 10 years.
The Labour manifesto does not rule out private funding, but there are likely to be more onerous restrictions.
It says that government suppliers will be expected to meet "high standards" by "paying their taxes, recognising trade unions, respecting workers' rights and equal opportunities, protecting the environment, providing training, and paying suppliers on time".
However, Gravis Investment Partners, which runs the GCP Infrastructure and GCP Asset Backed Income funds, believes that the situation in the banking sector is still likely to drive activity regardless of political changes.
Rollo Wright, partner at Gravis, says: "Since the global financial crisis in 2007-8, the mainstream banking sector has become ever more rigid and restricted in its lending activities, focusing on only the most standard and conventional of investments. This has been driven by liquidity and regulatory factors, but political uncertainty may well give yet more impetus to this widespread withdrawal."
The group says that alternative lenders are filling the void and adds: "Alternative lenders have expertise and experience in the debt markets, and just as importantly have established lending vehicles with access to appropriate capital.
"The listed investment trust sector has been at the forefront of alternative lending, with trusts such as GCP Infrastructure investments and GCP Asset Backed Income continuing to provide debt to a variety of UK projects neglected by banks."
This, it argues, is more important than changes to the private/public partnerships.
There may be other unintended consequences for investors of any changes to the taxation rules under a Labour government. Witty points out that any changes to capital gains tax (CGT) might see lower turnover in markets, for example.
Investors might be more inclined to stick with stock A, rather than switching to stock B if they know there would be an onerous CGT liability.
The increase in corporate tax might see fewer people set up limited companies, or more companies move abroad. This may affect the range of investment opportunities available.
The Labour manifesto also suggested bringing in a generalised anti-avoidance rule with a tougher penalty regime. This would incorporate any activity that looks like avoidance.
It is clear that the UK still has a big savings problem. New figures from the Office for National Statistics in May show that the UK's household savings ratio has hit an all-time low of 1.7%.
Knight says: "We do need to do something. We are heading for a serious problem in savings. By 2035, people retiring will be in a worst position than their parents. We need to see how we can encourage people to save."
Ultimately, this may inform the extent to which a new government clamps down on the tax incentives to save. However, if a Labour government is elected next time, investors should expect some realignment of the current incentives in place.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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