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Snap thoughts on the Con Dem coalition from a private investor’s perspective

Cameron and Clegg’s new coalition

What a relief. For a few terrible hours, it seemed a barmy alliance of the losers could have left Labour clinging to power.

As it is, the right parties got the job.

Yes – parties. I believe this coalition could be the best result for seeing Britain through the vital economic rebalancing to come. Coalitions led us through World War 2, and the fallout from the Great Depression. Partnerships can work.

Indeed, we’re already seeing some welcome changes to Conservative policy under the influence of the Liberal Democrats.

Update: Since I published this article the official ‘pre-nup’ agreement between the Conservatives and the Lib Dems is now available as a PDF from the Conservative website. The main difference between the facts and the early rumors I report below is that the £10K personal tax threshold is an aspiration, not a concrete figure that will be made law anytime soon.

Second Update: You can now download the final coalition agreement as a PDF.

Here’s my take on what it means for us private investors.

Steadier markets

Bank of England governor Mervyn King came out this morning and said he was pleased to see the coalition in place. Far from subtle, he said flat out that the need to tackle the deficit has grown even greater in recent weeks, clearly referring to Greece.

Labour hid the scale of the cuts required, and will doubtless barrack the new coalition in opposition. I don’t mind the latter so much – that’s the nature of a loyal opposition – but I can’t forgive the obfuscation before the election. We’re in a hole, and we need to get out of it. I’m glad King has stressed this.

Interest rates

These will surely remain lower as the coalition gets stuck into reducing the deficit faster than if Labour had kept running up unsustainable borrowing and spooked the gilt market. That said, King admitted today that inflation expectations are turning higher than he expected, which seemed to immediately hit the FTSE 100. As I’ve said before, I’d be more worried as a holder of bonds.

Higher personal tax allowance

It looks like the Conservative’s have adopted the Lib Dem’s excellent proposal that the first £10,000 earned will come free of tax. As I pointed out before the election, this makes nearly all of us better off. It’s also a clear and simple threshold, provided it applies universally.

Inheritance tax threshold will stay at £350,000

Hurrah! I haven’t yet revealed to Monevator readers how much I’m in favour of inheritance tax. I’m happy for there to be some portion paid tax-free, but beyond that I’d even raise the rate. I believe in equal opportunity, not huge handouts for the genetically over-blessed. If people have made money, let them enjoy it. But let their kids earn their own.

Capital gains tax will rise, perhaps to 40%

As an investor it was hard for me to complain about CGT being reduced to 18%. But I didn’t really understand the rationale, particularly as short-term trading was taxed at the same rate as long-term holdings. Perhaps the new tax rate that’s apparently on the cards will include the return of taper relief?

For now, it’s vital to take steps to avoid capital gains tax ahead of any changes. Active share traders may eventually need to consider running their trading portfolios via spreadbets to avoid CGT altogether. I’ll explain how to do this without taking on excess risk in a future post.

Tougher property taxes

Will we see the Lib Dem’s £2 million mansion tax? I doubt it. But there are reports that the new CGT proposals could hit the second homes market. In a country with limited housing supply, completely silly house prices and five million on the waiting list for council homes, I can’t shed a tear over that if it’s true. (I warned you I was no dyed-in-the-wool right winger!)

Middle class welfare cuts ahoy

I’m all for the coalition taking an axe to middle class handouts like Child Trust Funds. While I fear a dependency culture, I don’t mind paying for poor kids to have shoes and food. But I don’t see why I should pay for the well-off to treat their sprogs to an Xbox 360. Let people spend their own money.

Limited tax rises

I expect – and certainly hope – that tackling the deficit will be much more focused on cutting public sector spending rather than hiking up taxes. That said, even if the direst predictions of 5-10p on the basic rate of income tax can be avoided now Labour is out (and I think they can), some tax rises are inevitable.

A 1% rise in VAT generates £4 billion in extra income, so a rise to 20% or even 22.5% seems a good bet, although there will obviously be a knock-on consequence for consumer spending.

Pensions and ISAs

I believe ISAs are safe under the coalition. Pensions, however, could be the subject of some marital rows between the Liberals and the Conservatives.

Few people claim higher-rate tax relief, yet in total they claim a lot – scrapping it could save £5 billion a year. But that might be a step too far for Cameron’s Conservatives.

What do you expect from the next five years? Let us know in the comments!

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{ 10 comments… add one }
  • 1 Macs May 12, 2010, 2:15 pm

    I’ll nail my colours to the mast from the outset – I voted for the coalition partner that might not have been 😉 Still would have preferred Cable over Osborne for Chancellor….. but putting him in charge of the banks is a nice touch, though.

    My first response is that it seems to shift the tax burden somewhat from wages and on to capital (and possibly spending – I’ve not seen any final answer on VAT, either). Especially so if the NI hike has been averted. I heard on Radio 4 that the ‘mansion tax’ has been squashed as part of the coalition deal. I don’t live in a mansion, but I wasn’t particularly taken with that plan – I’m not averse to bashing the rich, but a levy on the market value of a fixed asset didn’t seem just.

    I like the 10k threshhold on IT, but wonder how much change in basic rate it would take to cancel that out?

    Overall, I’m quite pleasantly surprised (so far…) and I’m convinced the coalition has the will, mandate and determination to get to grips with the deficit and the national debt. In all, I think the tax changes will be appropriate for a time of austerity, which I think we all (should!) know is coming… and maybe we can expect the interest rates to go up, I’m beginning to sniff a bit of inflation. My rash prediction: base rate at least 0.75% by Christmas.

  • 2 OldPro May 12, 2010, 3:22 pm

    Well I never thought Id see the likes of that press conference on News 24 from Cleggeroon. Incredible body language. It was a reminder of a teenage holiday romance.

    If they can keep that up it may work. I voted Tory no surprise there. I disagree with those who say there was no appetite for comprehensive Conservative policy. Take out Scotland and England overwhelmingly voted Tory. Ironically the Scots will give them no credit especially Alex the Salmon.

    As long as VC’s mansion tax has been knocked over I’m satisfied for now. Thank heavens the other lot are out.

  • 3 FinEngr May 12, 2010, 5:52 pm

    Looks like you answered my tweet with a post – will read into the details later on.

    Best,
    .-= FinEngr on: Yakezie Weekly Round-up: Mother’s Day Edition =-.

  • 4 The Investor May 12, 2010, 7:52 pm
  • 5 Lemondy May 12, 2010, 11:21 pm

    Removing higher-rate tax relief without a wider review of pensions would be a tough break. I wouldn’t mind it so much if pensions were made a lot more flexible, e.g. by allowing withdrawals before retirement, or something like that. They have said they’ll remove compulsory annuitization which is great (except perhaps for the pensions industry!).

    I would bet on at least the CGT allowance coming down a lot. They say VAT increases are regressive (though it seems dubious) so I doubt they’ll hike that too much.

    People already pay CGT on a second home, right? What is the plan there, a specific high CGT rate for property (with primary residence kept exempt)? That sounds like an awesome way to, er, rebalance the housing market.

  • 6 The Investor May 12, 2010, 11:55 pm

    @Lemondy – Yes, I may have got confused about the early reports of CGT and housing (I wrote before the official details were published). I think they just meant the new higher rate would apply to houses as well as shares. The dangers of listening too closely to the BBC about financial matters. (If I hear one more reporter claiming the FTSE 100 fell and then rose on this UK political situation, I’ll, I’LL… quietly fume).

    The official ‘pre-nup’ agreement between the Conservatives and the Lib Dems is now available as a PDF from the Conservative website.

  • 7 Samurai May 13, 2010, 7:33 pm

    Excellent summary! Makes me thank goodness I don’t live in the UK! 40% Capital gains tax, cutitng middle class welfare, a 1% rise in VAT, only a 350K inheritance tax threshold (anything more gets taxed out the wazoo??)…

    Makes the US look awesome!
    .-= Samurai on: The List of Jobs I’d Do For Free Baby! =-.

  • 8 The Investor May 14, 2010, 9:12 am

    Hey Sam! Re: IHT after the threshold it’s 40%. Like Buffett I’m all for it.

    The CGT rise is politically understandable but utterly sucks. I’d spent some time and effort positioning myself for the lower rate (instead of income tax) and now must fiddle again!

  • 9 Samurai May 15, 2010, 6:27 pm

    Of course Buffet is all for it. Buffet can get taxed 99% and still be 99.99% richer than everybody on earth!

    Tell me more about the Etonians. Is it a tough school to get into?
    .-= Samurai on: Hire A Financial Adviser or Lose Money All By Yourself For Free? =-.

  • 10 The Investor May 16, 2010, 9:05 pm

    It’s pretty tough but also self selecting -not many people can afford to send there children to a £30k per year school. (It’s for kids, not a university – I know Americans often use school to mean university).

    If you want your child to grow up wearing fancy dress there’s no better place, which is probably why so many end up in the establishment.

    These top public schools routinely turn out incredible high achievers, but some of them can be ghastly, especially in their early 20s. One of my favourite friends was an Eton boy though, so there’s redemption.. 😉

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