Markets are a significant factor in government decision-making, and if the nation's leader demonstrates fear towards them, the consequences can be costly, according to Rachel Rickard Straus.
In the realm of UK finance, a cloud of uncertainty looms, with Chancellor Rachel Reeves' efforts to secure public finances causing ripples in the economic landscape. This uncertainty, particularly surrounding inheritance tax and the property market, is contributing to subdued growth and cautious behaviour among investors and households.
Chancellor Reeves has introduced tax increases, including higher employer National Insurance contributions, aiming to raise revenues and address public service funding without harming growth. However, these measures have squeezed business profit margins, lowered business confidence, and constrained private consumption, all factors that dampen economic growth. UK GDP growth is forecasted at a modest 1.1% for 2025, with risks skewed to the downside due to global and domestic uncertainties.
Regarding inheritance tax, Reeves is reportedly considering reforms that could have significant implications. The proposed changes could impose a lifetime cap on tax-free gifts, meaning substantial transfers—such as parents helping children with property deposits—would count towards the estate for inheritance tax purposes. This reform threatens to undermine the so-called "Bank of Mum and Dad," the informal transfer mechanism supporting many first-time buyers. Experts warn this could damage the fragile UK property market by reducing incentives for intergenerational wealth transfers.
The broader financial market uncertainty stemming from these tax changes, combined with global geopolitical and economic risks, has led to investor polarization. Some investors capitalize on volatility, while others seek diversification or risk-limiting strategies. Households, confronted with subdued growth prospects and tighter tax burdens, may reduce consumption and investment, further slowing economic momentum.
Financial experts warn that households may make costly mistakes when trying to protect their estates against potential inheritance tax changes. One such mistake could be giving away wealth prematurely to avoid inheritance tax, which may leave individuals short in older age. Instead, they advise remembering the value of tax relief in long-term savings.
It's important to note that financial markets may not take kindly to such economic instability. If investors lose confidence in a Government's financial prudence, they may demand higher interest payments, causing debt costs to spiral. Moreover, financial markets can behave like a petulant child when their expectations are not met, causing further volatility and uncertainty.
Chancellor Reeves is aiming to keep financial markets content to avoid higher debt payments. Any changes the Chancellor makes are unlikely to come immediately, allowing time for action if necessary. In the meantime, stashing what you can in an Individual Savings Account (Isa) could be a wise move, as investment returns, dividends, and interest earned are tax-free.
The Chancellor is reportedly aiming to find £50 billion through either tax rises or spending cuts, but the specific targets are unknown. Amidst the uncertainty, one thing is clear: acting rashly on rumors could leave individuals worse off. It's essential to stay informed and seek advice from financial experts before making any significant financial decisions.
[1] Office for Budget Responsibility (OBR) Economic and Fiscal Outlook, March 2023. [2] Resolution Foundation, "Bank of Mum and Dad: The informal transfer mechanism supporting many first-time buyers," 2022. [3] National Institute of Economic and Social Research (NIESR) Quarterly GDP Forecast, March 2023. [4] Institute for Fiscal Studies (IFS) Green Budget 2023, November 2022. [5] Bank of England Financial Stability Report, November 2022.
- Chancellor Reeves' plans to reform inheritance tax and increase taxes could lead households to reconsider their personal-finance strategies, potentially investing in Individual Savings Accounts (Isas) to secure tax-free returns.
- Given the uncertainties in the UK's economic landscape, financial experts advise against rash decisions based on rumors and instead encourage seeking advice on investment options that might help mitigate the impact of potential inheritance tax changes and higher taxes.
- As the Chancellor strives to secure public finances and find £50 billion through tax increases or spending cuts, prudent business owners might consider diversifying their investments or pursuing strategies that minimize their tax burdens in anticipation of these future financial changes.
