In July, the Chancellor, Rishi Sunak commented: “No, I do not believe that now is the time, or ever would be the time, for a wealth tax”. Since then, the economic impact and cost of the Coronavirus pandemic (expected to be £335 billion) has become more of a stark reality and the Government and Treasury are left thinking about which tax levers they can pull to cover the cost and tackle the UK’s debt burden.
Talk of a wealth tax has been prevalent for the last 10 years, but a new report published by the Wealth Tax Commission has proposed a £262 billion tax windfall for the Treasury over a five-year period. The report follows extensive research by a team of over fifty international experts on tax policy and practice. The three leading Commissioners behind the report include academics from the London School of Economics and Political Science, the University of Warwick and tax barrister, Emma Chamberlain.
The report from the Commission recommends a one-off wealth tax over a fixed five-year period. The wealth tax threshold could be set as low as £500,000, or £1 million for a married couple, and the Commission estimates it would capture over 8.2 million individuals.
The wealth tax proposal is simple: a person would need to value their worldly assets, including their main home and pension savings, deduct any liabilities such as a mortgage and apply a flat rate tax of 1% above £500,000.
When wealth taxes have been discussed in the past, it was expected that certain assets such as the main home and pensions would be excluded, but the Wealth Tax Commission argues that the tax should be all-encompassing.
The Commission’s report offers estimates of the potential tax revenues if a different wealth threshold was selected, ranging from £250,000 to £10 million. At the highest £10 million threshold, it estimates that 22,000 individuals would be subject to the wealth tax, generating £43 billion for the Government.
Whilst the content of the report makes for slightly uncomfortable reading, it makes a very compelling argument to the Government to raise significant tax revenue through a one-off mechanism, rather than adjust income tax, VAT or Corporation Tax. The report notes that all income tax rates would need to increase by 6% for a five period to raise the equivalent tax revenue.
There is a serious question around how someone pays a wealth tax if they do not have the immediate cash liquidity e.g. they are ‘asset rich but cash poor’. The Wealth Tax Commission notes that 570,000 people may be liquidity constrained at the £500,000 wealth threshold, and an instalment payment mechanism would need to be introduced ‘to reduce unnecessary hardship’.
It is worrying that a new form of tax could force people into hardship and a serious re-think would be needed here in my view. Pensioners who fund their living costs through savings, farmers owning agricultural land and private business owners will all be concerned by the proposals and how they will feasibly fund the tax. Such groups may need to take bank borrowing to pay the tax, although this may not be an option or cost effective for everyone.
In addition, there will be concerns around how an individual practically values their assets. Liquid assets such as cash and shares are straightforward, but property (UK and overseas), art, shareholdings in private businesses and carried interest in the case of private equity funds will require specialist input at the cost of the taxpayer.
Whilst the proposal from the Commission is that the wealth tax should be temporary, there is a risk that a future Government would be tempted to make the tax permanent. The argument for making the tax permanent is even more compelling after the considerable time and investment that would go towards introducing it in the first place, and a Government would be reticent to lose the tax revenue without easily replacing it.
Wealth is more mobile than ever and such a measure could push individuals away from UK shores, which would see revenues from other taxes decrease as a result. Entrepreneurs and their businesses are equally internationally mobile, especially technology-focused businesses. To confront the possibility that many would simply become non-UK resident for the period covering the wealth tax, the Commission proposes a ‘stealth’ introduction of a wealth tax to make it difficult for people to avoid. They suggest that the wealth tax would be assessed on the day the policy is announced, so that any actions taken by the taxpayer following would not be effective. This means that people relocating away from the UK subsequently are still potentially within the wealth tax net and obliged to pay the amount. Such a move would be highly aggressive and out of kilter with practice, as such dramatic changes to the UK’s tax system would normally command consultation from stakeholders.
The Commission’s report heavily plays on a one-off wealth tax for a temporary period, but also considers an annual tax which would be made a permanent addition to the UK tax system. The Commission argues that an annual tax would have greater complications in its operation, and yield significantly less tax revenue – around £10 billion, which is the equivalent to Capital Gains Tax, further highlighting the attractiveness of a one-off bullet tax. The Commission acknowledges that an annual tax leads to behavioural distortions where people can plan around the tax, or escape the tax completely by becoming non-UK resident.
The UK’s tax system is incredibly complex in its current form, and introducing a completely new tax is not necessarily the answer. If a wealth tax is to be introduced, it needs to be coupled with an overhaul or abolition of Capital Gains Tax and Inheritance Tax. The Government should also consider the existing taxes in play and how it can feasibly pull the levers to generate additional revenue through Income Tax, VAT and National Insurance, which currently account for almost three quarters of the UK’s total tax revenue. This means breaking the ‘triple lock’, which is politically sensitive, but the systems and collection mechanisms are already in place. As the Wealth Tax Commission proposes, increases to Income Tax, VAT and National Insurance could be for a temporary period and the additional revenue generated is ring-fenced for supporting the NHS and those people and businesses worst affected by the Coronavirus pandemic.
The Wealth Tax Commission’s findings are merely proposals for the Treasury and Government to consider. With the recent noise around changes to Capital Gains Tax and Inheritance Tax, it would be unsurprising if the Chancellor did not take notice of the Commission’s report, and he will be undoubtedly tempted to explore the option further. What remains clear is that now is not the time for dramatic changes to the UK’s tax system, and economic recovery and protecting the tax base should be the priority for the Government. What follows, however, could be some difficult and deeply unpopular changes by the Chancellor.