By Paul Fairbairn, partner at Cripps Pemberton Greenish
On 9 December the self-styled and in no way government-affiliated Wealth Tax Commission published their findings. This has led to many headlines about the potential introduction of a wealth tax in the UK. It cannot be stressed enough that the report is merely academic research and by its own admission not even a wholesale recommendation that one should be introduced. It brings together leading academics, professionals and policy makers and as such should not be entirely discounted. Nonetheless any suggestion that a wealth tax is likely to be introduced in the wake of this report should be taken with a pinch of salt. Rishi Sunak himself made the following statement in July of this year: “No, I do not believe that now is the time, or ever would be the time, for a wealth tax”.
What does it say?
The report is not in favour of a long-term annual wealth tax. To the extent that the report includes a recommendation it is a one-off wealth tax of 5% payable over 5 years at 1% a year on all individuals with wealth over £500,000.
Their detailed financial modelling predicts this would raise £260 billion. They are clear that wealth should be calculated net of mortgages and other debts. The value of jointly owned assets should be shared so for a couple jointly owning their assets the tax would only apply if they had over £1m of assets. Pensions would also be included in an individual’s wealth.
Importantly they provide comments on other taxes that over a similar 5-year period might raise £260 billion, such as a 6p increase to all income tax rates or a 5p corporation tax rise accompanied with a 4% rise in VAT. None of these are appealing but it has to be accepted that we live in extraordinary times and our government has incurred extraordinary expenditure and some form of tax rise is inevitable.
The report advances some positive arguments for a wealth tax. It does not (they allege) distort behavior in the way alternative rises might, such as discourage generation of income or deter corporations from basing themselves in the UK. Furthermore, from the government’s perspective it is a much harder tax to avoid being a one-off event based on wealth at a past point in time.
For those who like statistics there is plenty to digest, provided one looks past the spin put on it by the authors of the report. For instance, one table purports to show that the UK has average levels of existing taxes on wealth. However, to this eye, all it shows is that the UK has higher taxes on wealth than any of the other G7 countries, other than France, and cannot therefore afford to increase this burden.
Problems with a Wealth Tax
There are so many problems with a wealth tax that it is impossible to cover them all and it is probably not necessary. Contrary to the data presented in the report, wealth taxes are notoriously unpopular. The impact of the most recent French wealth tax was the departure of many, poorer than expected returns and a hasty watering down of the tax.
In the UK there is no existing wealth tax per se, so the cost to HMRC of introducing it and administering it would according to the report be £1 billion and the cost of compliance to the tax payers a further £4 billion, in addition to the tax itself. If existing taxes could merely have their rates tweaked for a 5-year period then this additional cost burden alone must be worth avoiding.
Even those that inputted into the report do not necessarily support its conclusions and make valid points about the almost impossible task of valuing all that one owns. How far does one go? If, to simplify matters, the tax only applies to real estate values then that would disproportionately impact
those at the lower end who have capital value on paper, in the form of their homes and pensions, but no liquid assets.
Should any action be taken?
It is never wise to take action to minimise exposure to a rumoured tax. Even more so when this is a hypothetical that the current government have unequivocally dismissed as an option.
Even if this proposal were taken seriously, it is questionable whether there is anything one can do. One of the advantages of a wealth tax trumpeted in the report is that it is hard to avoid. It is a snapshot in time and it would seem that the only way to divest yourself of the problem would be to ensure that you did not have wealth in the UK and were not resident. For most, the tax and other costs of achieving this would almost certainly outweigh the actual charge, particularly if it were a one-off charge.
The proposed wealth tax is on individuals and not families. To the extent that one was already thinking of spreading UK wealth amongst the family by passing UK assets down to the next generation (e.g. to take advantage of the inheritance tax rules in the UK) then this may provide a small incentive to bringing this forward.
A wealth tax would be a major departure from the norm of the UK tax system. It has been dismissed by the government and is historically unpopular. Whilst the Wealth Tax Commission report makes for interesting academic reading this is all it should be treated as.