Wealth tax – will the UK be richer for it?
It is no secret that the Chancellor will need to raise revenue from somewhere to plug the growing budget deficit. Treasury borrowing to fund record Government spending in response to the Covid-19 pandemic is estimated to amount to £400 billion this financial year, amidst plummeting tax receipts. The Chancellor has already warned in October that “hard choices” on tax and spending will need to be made.
It is in this context that the Wealth Tax Commission (the Commission), which was established in April 2020, and having considered evidence from over 50 tax practitioners, policymakers and academics over recent months, has made the case for a one-off wealth tax  in its 126-page report  (the Report).
The idea of a form of wealth tax is not a new one (the so-called “mansion tax” was mooted after the financial crisis in 2008-2009) but seems to be back in vogue now. Argentina passed a tax on its wealthiest earlier this week in response to the Covid-19 pandemic, and Spain announced something similar last month. As the Commission recognises, however, the general trend is in the opposite direction; wealth taxes have been in retreat across the globe in recent years.
The Commission estimates that such a tax could raise £260 billion over five years, which might seem appealing to the Chancellor when one considers that the Treasury received £635 billion in tax receipts in the financial year 2019/20. On the face of it, it seems a relatively simple way to make up the deficit as quickly as possible. It also appears to have the public’s backing, as a YouGov poll in May found that 61% of people would approve of a wealth tax on those with assets of more than £750,000. It is, of course, easy to be enthusiastic about a tax that only other people will have to pay.
Crucially, however, the hypothetical wealth tax which was the subject of the poll excluded the main home and pension fund (which for many people are the primary forms of wealth) – whereas the wealth tax proposed by the Commission specifically includes these. This may explain why the “live poll” on The Times website and readers’ comments on The Telegraph and Financial Times websites, for instance, appear to demonstrate much less enthusiasm now.
How would the proposed tax work?
- It would be a one-off tax of 5%, payable in instalments over five years, on a person’s total (worldwide) net assets above various thresholds of £500,000, £1m and £2m per person (which would respectively cover 17%, 6% and 1% of the adult population in the UK), with the possibility of sharing the allowance between couples.
- It would be paid by any UK resident, including those domiciled outside the UK. Recent emigrants from the UK would also be covered by the operation of a so-called “backwards tail” in an attempt to ensure emigration is not successful in avoiding the tax. An individual would be subject to the one-off wealth tax not only if he/she is UK resident in the year for which the tax is imposed, but also if he/she was UK resident in at least four of the previous seven tax years preceding the year of assessment. However, this idea raises serious issues as to retrospectivity, and the general principle that taxpayers should be able to plan their affairs in advance, with knowledge in advance of what the broad tax consequences will be.
- Trust assets would be subject to the tax where the settlor is UK resident in the year of assessment (regardless of the trustee’s residence and, remarkably, whether or not the settlor can benefit). In addition, the tax would apply where the trust fund is subject to an interest in possession held by a UK resident beneficiary, even where the trust’s settlor does not satisfy the residence requirement. There are some subtleties to the proposed tax treatment of trusts which are set out in detail in the appendix to the Report.
- It would be paid on all assets, including main homes, other properties, pension funds, as well as business and financial wealth.
- Above the agreed threshold, there would be no exemptions or reliefs (other than for items worth less than £3,000).
Why might such a tax be introduced?
According to the Commission, a wealth tax would be “very difficult to avoid” and the chief argument in favour is that it would be more “fair and efficient” than raising tax on income or spending which currently make up 60% of the Government’s tax receipts. It is pointed out in the Report that in order to go some way to raising the equivalent sum of £260 billion, the basic rate of income tax would need to be increased to 29% and VAT increased by 6%. In their manifesto for the General Election last December, the Conservatives specifically pledged not to increase income tax, national insurance contributions or VAT, so increasing these taxes now would potentially result in embarrassment (although there has clearly been a material change in circumstances which were unforeseen at the time that was written).
The Report also highlights that there is precedent for the use of such one-off taxes after major crises, citing France, Germany and Japan after the Second World War and Ireland after the global financial crisis.
Lord Gus O’Donnell, who sits on the Commission, notes in his foreword to the Report that it is envisaged only to be a “one-off” and that such a wealth tax on an annual basis would be a “non-starter”. However, the fact that a five-year period for payment has been suggested might mean that this becomes a regular feature of UK tax policy, particularly if it ends up bringing in the amount of revenue predicted.
Why might the tax not be introduced?
Opponents express concerns as to how those who are asset-rich but cash-poor will be able to fund the tax. This is a potential problem for those who have their wealth wrapped up in illiquid property, including of course not only home owners but also farmers and private business owners. The Report acknowledges this issue and tries to deal with it by offering the instalment option. It draws on other analysis to suggest that these problems will be faced by relatively few people, but acknowledges the lack of hard data about this. We suspect the Report may underestimate the problems of illiquidity faced by many who might have to pay this tax.
Even if it is only imposed on a one-off basis, the wealth tax could lead to an exodus of people from the UK, which, in the long run at least, would adversely affect the tax take. The Report recognises this risk (with the application of the “backwards tail” mentioned above, for instance), and this is also one reason why it is proposed to be a one-off rather than annual tax. But arguably, the Report downplays the likelihood of individuals leaving the UK (or, equally seriously, not moving to the UK when they otherwise would have done so) and the long-term impact the tax could have on perceptions about the attractiveness of the UK, and the fairness and stability of the UK tax system.
There are of course plenty of examples of supposedly one-off taxes that have become a permanent feature of the tax system. For wealth tax, this may be difficult to resist once the infrastructure of assessment has been established, and the information about the nation’s assets collected.
There are also administrative costs and difficulties in introducing such a tax. These are addressed at some length in the Report, although the practical barriers to implementation, where so much information is lacking about the assets that would be subject to the tax, is significant. It was practical problems of this kind that caused Germany to abandon its wealth tax in the mid-1990s. Many other countries have had similar experiences.
The Report also observes that reform of existing wealth taxes, i.e. council tax, capital gains tax and inheritance tax, is overdue. Although it does not suggest that the same ends can be met by such reform (presumably because the tax receipts will be spread over a much longer period of time), such reform may yet prove the easier approach.
Will it happen?
There can be no doubt about the hole left in the country’s finances by Covid-19, and clearly ways will have to be found to fill it. However, there have been statements by a Treasury spokesperson, and by the Chancellor himself, to the effect that a wealth tax is not on the cards. It seems unlikely therefore that a wealth tax will be introduced by this Government, at least in the near future. In his Summer Economic Update in July, Rishi Sunak said that he believes there would never be an appropriate time for a wealth tax, and the Shadow Chancellor, too, rowed back on Labour introducing such a tax, after Sir Keir Starmer initially called for it to be considered.
With this in mind, and the Government’s manifesto pledges mentioned above, it seems far more likely, if there are to be tax changes in the near future to help bring down the deficit, that there will be reform of existing taxes.
For example, the Chancellor may seek to raise additional revenues by increasing the rate of capital gains tax  (possibly so that CGT rates are aligned with income tax rates), ending higher rate pension tax relief, and making further changes to the taxation of dividends and business disposals.
The question of how the deficit is to be repaid is of course ultimately a political question. Much will depend no doubt on the final costs of the Covid-19 crisis, once the dust has settled and deferred tax payments have caught up, as well as how Brexit starts to affect the UK economy, and whether the Government can raise the required revenue from other sources. This picture is likely to remain unclear for some time.
In addition, before making such a radical change to the UK tax system, the Government must be sure it can be justified in terms of cost and complexity, is not unfair in how it falls on those affected, and will not diminish the overall stock of human capital in the country. If it made the UK less attractive to the affluent and the entrepreneurial, and distorted economic behaviour, a wealth tax might end up costing the Exchequer more in the long run than the hole in the country’s finances it seeks to fill.
 Is it really time for a wealth tax? | Charles Russell Speechlys and Wealth tax for the UK?, Sophie Dworetzsky (charlesrussellspeechlys.com)
 A-Wealth-Tax-For-The-UK.pdf (squarespace.com)