Wealth Tax - what is it good for?

A Wealth Tax … What is it good for? Well, not absolutely nothing, according to the Wealth Tax Commission. Say it again?

Yes, you heard correct. That’s according to The Wealth Tax Commission, who produced a report on 9 December 2020 making the case for a one-off wealth tax in the UK to assist with the colossal debt burden the nation has taken upon itself in dealing with the Coronavirus pandemic. A wealth tax would be a tax on all assets held including your home and pension aimed at wealthier individuals. 

The publication of the report is timely. In its introduction it quotes the Chancellor of the Exchequer, Rishi Sunak, as having said:  "No, I do not believe now is the time, or ever would be the time, for a wealth tax"

However, that was in May 2020 and the report reminded the reader of John Maynard Keynes’ famous quote: "When the facts change, I change my mind"

The pandemic has presented Governments with a tremendous challenge. It is clear that the UK Government has decided to borrow from the future to pay for today, keeping people employed and avoiding the devastation that would be caused by mass unemployment, whose tentacles would extend well beyond those immediately affected. Keeping people in jobs is a key tenet of the Government’s response to the pandemic, evidenced by the way in which the furlough scheme has been extended again and again as events unfold, although whether coverage has been cast sufficiently wide, is open to debate. 

Whilst interest rates remain low, the costs of such borrowing might be cheap, but the prospect of repaying it cannot be ignored. It is one of many huge elephants in the room for the Government at the moment and something that the Chancellor will be turning his attention to, perhaps starting with the Budget which takes place on 3 March 2021.

UK Government borrowing hit its highest ever recorded level in December 2020 at £34.1bn, which is £28bn more than a year ago. The Budget Deficit, which represents the difference between spending and tax income plus other receipts, now stands at £271bn which is a rise of more than £212bn compared with this time last year. That is a huge amount and will need to be reduced. Quite whether Rishi Sunak feels the time is right to address this in the up and coming Budget is, however, not clear as we enter perhaps the darkest weeks of the crisis. It is clear, however, that the damage done exceeds the worst of the financial crisis of 2008. 

Debt must, at some point, be addressed and my colleagues commented on some potential tax changes the Chancellor may consider, last week in our article Tax rises may be coming – are you prepared?  This note however, focuses on a Wealth Tax, often discussed but rarely with any seriousness. Perhaps this is the moment when we should consider it more seriously.
 

One-off taxes are not without precedence

In Ancient Greece ‘eisophora’ was an extraordinary tax levied in Athens by the assembly at a rate of their choosing, on declared property exceeding a certain value. More recently think back to the Windfall Tax on the excess profits of the privatised utility companies introduced by Labour in 1997. We also know, according to a You Gov poll in May 2020, that more than half of the UK population would welcome a windfall tax on companies that have thrived during the pandemic and, when it comes to taxing individuals, 61 per cent would approve a wealth tax on those with assets above £750,000. 

This chimes with the Wealth Tax Commission’s report. It appears the great British public have a preference for taxing wealth as opposed to taxing earnings from labour, and the Commission was supportive of an ‘exceptional response to a difficult crisis’, favouring a one-off wealth tax as opposed to an annual one. 

But what difference would it actually make?

By way of an example, they surmised that a one-off wealth tax, levied at 1% on net wealth above £500,000 (net of mortgages and debt and in an individual’s name) could raise as much as £260bn. To raise equivalent amounts from other taxes would mean a 9% increase on the basic rate of income tax, or all income taxes rising by 6%, or VAT up 6% or Corporation Tax up 5% and VAT up 4%. 

In terms of those liable to pay such a tax, well this depends on the level of wealth at which the tax might kick in. At £500,000 of net wealth, the potential pool is 8m people. At £1m it falls to 3 million individuals and at £2m it falls to 626,000 individuals. 

The Commission highlighted some important policy features. A wealth tax should:

  • Raise a substantial amount to be worth the effort, be run efficiently (which favours a one off as opposed to annual tax)
  • Be applied fairly (applying to individuals not households and all property, whatever form that takes) and allow for liquidity (offering deferred payments if asset rich, cash poor). 
  • Be hard to avoid (using open market values)
  • Be a one-off tax and be credibly a one-off tax, so as to avoid behavioural distortions which often occur when changes take place to income tax, capital gains tax, or corporation tax. 

A one-off tax would be preferable - the Commission argues - to an annual tax, which would require regular assessments, carry higher administrative costs, and give rise to potential changes in behaviours, lessening the potential tax take. They cite evidence in other countries of a fall in tax revenues when an annual wealth tax is used. 
 

So, what can one do to prepare for a wealth tax?

Well, probably nothing. We don’t know one is coming and, if it does arrive, it almost certainly won’t be flagged in advance with a future date but would be applied retroactively, perhaps, instead. The mood music for a wealth tax appears to be changing, although not necessarily within the Government, so I suspect, as with other often mooted tax changes, the rumours will be incorporated increasingly into future Budget speculation.  

What we do know is that the Government will need to start addressing the debt burden soon. My own suspicions are that other changes to the tax system are more likely to be announced, such as a closer alignment of capital gains tax with income tax, changes to corporation tax or property taxes, alterations to National Insurance for the self-employed, and changes to tax relief on pension contributions. 

Whether any of these happen, at this Budget or any other, is of course pure conjecture … until it’s not. 

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Please note: This article has been written by Alex Hatfield, a Partner and Chartered Financial Planner at The Private Office. Alex has been with The Private Office since 2014 after a prolific career as a senior financial adviser following his graduation from Hull university with a BSc in Economics in 1991. For more information about Alex Hatfield take a look at his profile here. The views, thoughts and opinions expressed in this article belong solely to the author and do not necessarily reflect those of The Private Office. The content is for general information only, does not constitute individual advice and should not be used to inform financial decisions. Most importantly, investment returns are not guaranteed and you may get back less than originally invested; past performance is not a guide to future returns.

Source

  1. The Wealth Tax Commission full report