The fact that the possibility, however remote, of a Conservative government introducing a one-off wealth tax is being discussed shows just how hard the UK’s economy has been hit by the coronavirus pandemic.
Recently, the Wealth Tax Commission – a group of leading UK tax experts and economists - has produced a report which urges the UK to raise a one-off levy on assets held by the richest in society. The suggestion is that a wealth tax would be both a revenue raising measure but also an attempt to address what many have argued are growing levels on inequality. The authors project that a flat rate tax of 5% on assets over £500,000 on an wide tax base could raise at least £260bn. To put that into context the UK’s GDP for 2019 was £2.17 trillion.
The introduction of such a tax would be swimming against the tide, as the number of OECD members imposing annual net wealth taxes has fallen from 14 in the 1990s to just 3 today and EU member states have also been ditching these provisions. This reflects the fact that such taxes are often costly to administer and do not raise as much tax as they were initially projected to do.
A few key observations on the report are that:
- The proposed tax would be levied on the worldwide assets of any individuals who were UK resident on the effective date. UK residents who are not UK domiciled would still fall within the scope of the proposed tax.
- The suggested measure contains few exemptions - main homes, pensions, businesses, farms and personal items with a value over £3,000 would all be within its scope. In practice it is this wide ambit that would be the most politically difficult for any government to navigate. Individuals may support such a tax until they discover that they are one of the “wealthy” few who fall to have their assets taxed. There are no equivalents to business property relief or agricultural property relief found in the inheritance tax legislation to protect against tax charges on business owners.
- The tax is designed to be payable in instalments over five years with interest but without penalties (with tax on pensions able to be deferred until retirement or earlier drawdown) to alleviate issues with liquidity. That said, the tax liabilities may still require taxpayers to sell assets or borrow money where they do not otherwise have the funds to pay the tax.
- A particular difficulty arises out of the inclusion of business assets and homes where it may not easily possible to raise funds (even over the five year period) without selling that business or property and where that sale might also attract capital gains tax leading to effective double taxation.
- Finally, the most political tricky issue of all would have to be faced head on. The old age pensioner with a state pension but a house worth a million pounds plus will need to find funds to pay the tax. This could force them to sell the property or to try to raise debt - something in the circumstances may be difficult or impossible to do.
The Chancellor, Rishi Sunak, has reportedly stated that there is not now and never will be a time for a wealth tax. However, the full scale of the UK’s economic crisis is yet to fully unfold so you never know.