Now that the 2020/21 tax year has come to an end, there are a variety of tax filing obligations on employers. One of these obligations is…
Introducing a wealth tax for the UK has not been seriously considered for nearly 50 years, and yet, as the deficit due to Covid reaches 19% of GDP – the highest peacetime figure ever and twice the figure at the peak of the financial crash of 2008, it is something that has moved up the agenda.
In addition, if Boris Johnson’s Government sticks to their promise that there will be no return to austerity, taxes will inevitably have to rise.
In April 2020, the Economic & Social Research Council funded a project, involving a network of experts on tax policy, to provide evidence of how a wealth tax could work. They looked at two options, an annual tax and a one-off tax on wealth and have recently presented their findings [see full report here].
They have not made recommendations as to the percentage of tax and at what level of wealth the tax should be levied, instead they have modelled various scenarios.
This proposal is one that needs to be appreciated by our clients as a possibility. With that in mind, we have summarised the key conclusions of the Wealth Commission.
Why a wealth tax?
A wealth tax is a tax on most (or all) types of assets – net of debts. As part of the research carried out by the Wealth Commission, public attitudes were surveyed which found (perhaps understandably) a clear preference for any tax increases to affect wealth rather than income. A wealth tax was much more popular than rises in income tax, VAT, council tax or capital gains tax. Whilst this alone is not a reason for a wealth tax, the Wealth Commission argued that it is important to understand the motivations of people when introducing a new tax.
They also produced clear objectives for a wealth tax and what it would need to achieve in order for it to be successful.
Objectives – the tax should:
- Raise substantial income
- Be efficient
- Be fair
- Be difficult to avoid
- Achieve these objectives better than the alternatives
A one-off wealth tax
Individuals are taxed once, based on the wealth they owned at a particular date. They can pay the tax in instalments over a number of years.
The tax certainly has the potential to raise substantial income – if individuals were taxed at wealth above £500,000 and paid 1% per year for 5 years, it would raise £260bn. If the threshold were £2m, it would raise £80bn.
To raise the same money from other taxes, the Government could look at one of the following options, but these may not be so palatable to the general population:
- Raising basic rate of income tax from 20p to 29p
- Raising all income tax rates by more than 6p
- Increasing VAT rates from 20p to 26p
- Increasing corporation tax by 5p and VAT by 4p
Levying the tax on the individual will make it efficient to administer, as it is consistent with most of the personal tax system, making it easier to integrate. Additionally, it doesn’t distort behaviour, unlike other tax rises, for example:
- Increases in income tax can reduce the incentive to work
- Increases in capital gains tax can reduce investment
- Increases in corporation tax encourage companies to reduce UK taxable profits
As a retrospective tax, it is difficult to avoid. If the policy was announced and the reference date was the same day or very soon afterwards, there would be no time to respond. Of course, the cost to this would be that it is insensitive to subsequent changes in wealth – say if it was chosen that the tax should be levied at 1% over 5 years.
The Wealth Commission are very clear that the wealth should include all types of asset, and the Government should resist calls for exempting assets. Individuals of similar means should be taxed fairly, regardless of those assets – cash, property, pensions, businesses, land or fine art. It would apply to worldwide assets of anyone who is UK resident on the assessment date and non-residents holding UK real estate (including indirectly, for example, within a company). A backwards tail could apply to individuals who have already left the UK, causing them to be within the charge, and a prorated charge could apply to new arrivals to the UK, depending on their time in the UK as at the assessment date.
An issue with this approach is where someone is asset rich but cash poor – say, someone living in a main residence that is worth a substantial amount of money or some farmers and landowners whose wealth is tied up in the land. The Commission do make provisions in the report for this, firstly by suggesting the payment should be made over 5 years, but also by introducing a statutory deferral scheme for those who are unable to pay.
Key recommendations – the tax must:
- Be credibly one-off and it must not be pre-announced to avoid forestalling
- Apply to all residents (including non-doms and recent emigrants)
- Include all assets – except low value items (below £3,000)
- Assets should be valued at open market value
- Allow for deferrals for those who are liquidity restrained
- Special exemptions and reliefs should be avoided
An annual wealth tax
This was roundly rejected by the Wealth Commission – the increased administration costs would be too great at the £500,000 mark and the liquidity issues would be much more difficult to allow for. There would also be potential changes in behaviour that an annual tax would bring – more wealth being held overseas, for example.
It was therefore recommended that if the Government wanted a more long lasting tax rise, instead of introducing a new tax, the existing taxes on wealth should reformed. Major structural reforms and not just tinkering around at the edges – so inheritance tax, capital gains tax and council tax should all be considered.
An annual wealth tax was seen to be a poor relative of this approach.
HMRC & Office for National Statistics (ONS)
The Wealth Commission also highlighted the lack of data on high wealth individuals (those with over £10m in assets) and recommended that significant resource be given to HMRC and the ONS to ensure that the data is accurately recorded in order to inform policy making in the future.
Whilst it has to be remembered that this report is a series of recommendations and is not policy – the case for a one-off wealth tax in its purest form as described here, to help reduce the deficit incurred by the Covid crisis, could be a strong one for the Government if it wants to raise a significant amount of additional tax to help balance the books.
If, however, the Government is looking for more than a one-off payment, then a more comprehensive set of reforms on those taxes on wealth mentioned above seems more likely.