With confirmation from Downing Street that there will be a General Election in just a few short weeks, many investors will be wondering what impact this may have on financial markets. What could a potential change in government mean for your investments and returns? Russell Brett explains all.

The Prime Minister has announced that a General Election will be held on 4th July. In Rishi Sunak’s own words, “now is the moment for Britain to choose its future” – but what does that mean for you?

Will a General Election impact financial markets?

The short answer is ‘yes’. While the Conservatives promise “a clear plan and bold action”, the Labour Party counters that a change in government will spur growth, combat economic decline and put an end to uncertainty – but the process of preparing for an election itself typically causes economic uncertainty. As Keir Starmer himself states, an election is “an opportunity for change” – and fiscal markets are by no means immune.

However, regardless of which leader stands victorious at the lectern next month, how might the next six weeks of fervent campaigning and a potential change in leadership affect your long-term investments?

The three ‘big ticket’ election concerns

Whatever your political affiliation, rising costs of energy, food and essentials have impacted everyone over the past few years. After 14 consecutive increases in Consumer Price Inflation culminating in it reaching a 40-year high in 2022 and then the UK having tentatively entered into a recession, the outlook is finally looking up.

Inflation is now ‘normal’ at just 2.3% and very nearly within the Bank of England’s 2% goal – at its lowest level in almost three years. However, economic growth is slow. 

What legislative and fiscal changes could a change of government entail for this slow but promising economic upturn? Investors and savers alike are bound to be asking this very pertinent question. 

The three main concerns for UK voters, according to the academic and political expert Matthew Goodwin, are likely to come down to:

  1. Healthcare
  2. Inflation and the cost of living 
  3. Immigration.

Changes to Inheritance Tax, Capital Gains Tax and Income Tax look unlikely

If the Conservatives cling to power, it seems illogical to assume they would stray from their stances on the above items, meaning current legislation would likely remain intact. However, the disapproval rating for Rishi and his parliament is remarkably high, with satisfaction levels now as low as John Major’s in 1994. 70% of people want a change in government – but whether they get it remains to be seen.

This is all supposition, of course, but with a growing sense of ambivalence across the voting public, it seems increasingly likely that we will soon see a Labour government. If this happens, how might they upturn current taxation policies?

There’s very little leeway in further adjusting Income Tax – indeed, it is frozen at its current thresholds until 2028. If Labour becomes government, I would think it very unlikely they’d tinker with this. Similarly, I don’t see any real incentive for them to make any (negative) changes to Capital Gains Tax – which has already been slashed during the Conservative Government from a £12,300 annual tax-free allowance in 2021/22 to just £3,000 this year.. 

The issue of Inheritance Tax also looks very improbable to be contested, regardless of whichever party wins out – as removing or diminishing it goes against Labour’s principles, should they win, as the tax penalises those with more assets.

Would a Labour government reintroduce the pension Lifetime Allowance or LTA, whereby pension holders with pension assets above a certain level would be charged a further tax on withdrawals? We heard the current Shadow Chancellor instantly state that they would reinstate this Allowance once they were ‘in power’, but in reality, would they? And if they did, what caveats would there be for certain Public sector employees such as NHS doctors and how would they justify these caveats to the Private sector?    

One thing that certain voters may err in favour of the Conservatives for is Labour’s proposed abolition of the tax-free status of private schools – which would make fees subject to 20% VAT. However, with only 5.9% of UK children in private education, this is unlikely to swing the needle for the Conservatives on its own.

What can investors expect?

I don’t claim to be omniscient, but looking at the current figures, public sentiment and economic outlook under present legislation, investors should not be especially concerned about what is in their pocket or their portfolios at this time. 

Whether Rishi succeeds in keeping his premiership or Keir uproots him to bring the UK its first Labour government in 14 years, I am confident that either person as Prime Minister will look to further ease inflation, reduce the cost of living and bolster economic growth. Indeed, if things continue with the slow but fledgling promise currently shown, we could logically expect two, perhaps even three reductions in Interest Rates before the year’s end.

However, while there is no need to panic, that doesn’t mean investors can become complacent. The best defence against changing conditions is speaking to your dedicated financial adviser.

Get in touch today to make shrewd investment decisions and balance risk throughout your portfolio now to potentially yield greater returns down the line.