Since then, the government’s financial response to Covid-19 has led government borrowing, reaching £34 billion in December 2020. That’s a hefty £28.2 billion more than in the same month in 2019. So it’s no surprise that the thorny issue of how to improve the UK’s finances keeps resurfacing.
You might have heard one of the more contentious ideas – a one-off tax on the wealthy, proposed in a report by the self-appointed Wealth Tax Commission. Among other options, it proposed a one-off tax payable on all individual wealth above £500,000, charged at 1% a year for five years. But is it likely to happen?
We think a one-off wealth tax is unlikely. Firstly, political will is lacking – Chancellor Rishi Sunak has poured cold water on the idea, declaring it “un-Conservative”. It would certainly prove deeply unpopular with both Conservative Party members and wealthy voters. Labour leader Keir Starmer is also lukewarm about the prospect of a wealth tax, skirting round the subject in an interview with The Times in February 2021. He also remarked that “tax rises are not the right way to ensure that we go forward to a more thriving economy”. This is far from a ringing endorsement.
In addition, most wealth in the UK is in main residences and pensions. A large chunk of that pension wealth is in defined benefit schemes, which are widely held in the public sector, including by NHS workers. Politically, it would be very difficult to include this wealth in the scope of a tax and still be seen favourably by the electorate – a point the Wealth Tax Commission’s report glosses over. And if main residences and pensions were removed from the scope of the tax, limited revenue would be raised, defeating the purpose.
A lot of wealth is hard to value – think property, defined benefit pensions, unlisted shares/business assets or collectibles. Almost inevitably, wealth would be ‘conservatively’ valued and reported. Moreover, a lot of wealth is illiquid, and some people will not have the means to pay a wealth tax on illiquid assets. The suggested solution, tax deferral mechanisms (e.g. waiting until a property is sold, or you are old enough to access your pension), won’t fill the government coffers in the short term (which is, presumably, the point).
In the UK, almost all current tax systems are set up to tax either income or transactions (flows of wealth). We don’t have existing mechanisms to tax pools of wealth. Consequently, tax reporting and enforcement policies would have to be created more or less from scratch – an inefficient approach for both taxpayer and HMRC alike.
What’s more, a lot of liquid wealth is internationally mobile, especially among the very wealthy. The serious prospect of a supposedly ‘one-off’ wealth tax would prompt many to simply move their wealth elsewhere.
The international experience of wealth taxes has generally been one of failure, for the reasons we outline above. In France, a wealth tax introduced by Francois Mitterand in 1988 was in place until 2017, when President Macron abolished it. The tax was applied at a rate of 0.5–1.5% to those with a net worth exceeding €1.3m.
It was not a resounding success. The money raised was less than 2% of French tax receipts, and the wealthy (unsurprisingly) took a dim view of the tax. It’s estimated that 60,000 millionaires left France in the 16 years from 2000 – taking with them the money that would have been subject to income tax and VAT.
It’s clear that other governments around the world will be looking to bolster the coffers drained by Covid-19. But in our view, there’s next to no chance that new wealth taxes will be rolled out across the world in a way that would give the UK government easy political cover to do the same.
Clearly, the government needs to balance its books somehow, and we’ll hear more about this in today’s spring budget, but with interest rates at current levels, and the economy far from out of the woods, there’s not currently much urgency to do so. When the right time comes, we think it’s more likely that changes will be made to existing taxes, noting that capital gains tax (CGT), inheritance tax (IHT), stamp duties and council tax all, to one extent or another, target wealthier taxpayers. But to raise serious amounts of tax, the government will have to look elsewhere, to the main revenue streams of Income Tax, National Insurance and VAT – all of which the Conservatives promised not to raise at the last election – and to corporation taxes.
We’ll conclude by reiterating our view that a one-off wealth tax should not be a concern for high-net-worth individuals. In case of changes to existing taxes we recommend that clients take full advantage of their existing tax-efficient allowances before 5 April 2021.
If you’d like to discuss potential tax changes in more detail, please get in touch.
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