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Is a new wealth tax on the way?

11 December 2020

Ashleigh Maloney, Wealth Planner

You may recall in July 2020 Chancellor Rishi Sunak said, "I do not believe that now is the time, or ever would be the time, for a wealth tax." So why has this question surfaced again?

Crucially, there have been two changes since Sunak said this. Firstly, the effects of COVID-19 have unfortunately been greater than anticipated and the predicted deficit has almost doubled[1] since his July comment. Secondly, there had not been a serious review into the potential for wealth tax and the practicalities of implementing legislation around this in over 50 years. There has now been one, with the findings of the Wealth Tax Commission published on Wednesday 9th December.

The Wealth Tax Commission

A ‘wealth tax’ is a broad-based tax on the ownership of net wealth (i.e. assets less liabilities). Broad-based means a tax on all types of asset, not just on a specific type, e.g. property. Wealth taxes have been used by many other countries over the years. The UK, however, has never had a tax like this, although this method has been considered before, just never introduced.

The Wealth Tax Commission, an independent body, was established in Spring 2020 to provide in-depth analysis of proposals for a UK wealth tax for the first time in almost half a century. They commissioned a network of over fifty international experts on tax policy, including academics, policymakers and tax practitioners,[2] to contribute evidence on whether a UK wealth tax is desirable and deliverable, and have now published their final report: 'A wealth tax for the UK.'

What does the report say?[3]

An annual wealth tax is a likely non-starter. The Commission recommends that the UK Government should focus on a reform of existing taxes on wealth instead (i.e. inheritance tax, income tax on investment income, capital gains tax and council tax).

However, a one-off wealth tax could work and could be implemented without structural changes to the existing tax system. The suggestion is that it is paid by all UK residents with a net worth over a certain threshold (including assets such as primary residences and pensions), payable in instalments over 5 years. 

As highlighted in the recent Spending Review, the COVID-19 pandemic has challenged our public finances and the tax system. Tough choices will have to be made. Avoiding these today could lead to tougher choices going forward. In order to not return to austerity, it is widely accepted that taxes may need to rise. This could be done by breaking the Conservatives' manifesto commitment by increasing income tax, National Insurance contributions or Value Added Tax (VAT), or by considering the implementation of new taxes (such as a wealth tax).

Looking back through history, the implementation of one-off taxes, where there has been public understanding that change is needed, has been seen before under both a Conservative and Labour government due to specific circumstances at the time. A wealth tax could be viewed in a similar way, as an exceptional response to the pandemic, with the burden of the crisis being shared by those with the broadest shoulders. Research on public attitudes carried out by the Commission showed a clear preference for any tax increases to fall on wealth rather than on income. A wealth tax, rather than some other tax on wealth, was the most popular suggestion.

A one-off tax could raise up to one-quarter of a trillion pounds over the next five years. One of the examples given was a one-off wealth tax payable on all individual wealth above £500,000 (i.e. a £1 million household). Charged at 1% a year for five years, it would raise £260 billion. At a threshold of £2 million, it would raise £80 billion.

Alternatives to raise a similar level over 5 years are a basic rate income tax rate increase of 9% (to 29%); all income tax rates increasing by more than 6%; VAT rates to increase by 6% (to 26%); corporation tax increase of 5% together with a VAT increase of 4%.

Concluding thoughts 

It remains to be seen the extent to which the Government will take note of the recommendations outlined by the Commission. It does, however, bring an important contribution to the debate and reaffirms the opinions of a growing minority who believe that a one-off tax on wealth could be the simplest and fairest way to deal with the UK's longer-term economic difficulties.

If you have any queries about a potential wealth tax, please speak with your LGT Vestra contact.

[1] Wealth Tax Commission Final Report: A wealth tax for the UK

[2] Contributors to the Commission included economists from the Institute for Fiscal Studies, Resolution Foundation, Institute for Government and the Organisation for Economic Co-operation and Development (OECD). Evidence was also received from tax practitioners and policymakers including the former head of Her Majesty's Revenue and Customs (HMRC). The Wealth Tax Commission is an independent body funded by the Economic and Social Research Council (ESRC) through the Centre for Competitive Advantage in the Global Economy (CAGE) at Warwick, by a COVID-19 Rapid Response Grant, and by London School of Economics (LSE) International Inequalities Institute Atlantic Fellows for Social and Economic Equality (AFSEE) Covid-19 fund.


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