Wealth Tax Report
In December 2020, The Wealth Tax Commission (WTC) published its final report on whether a UK wealth tax is desirable and deliverable.
The WTC is a group of economists, academics, and tax professionals and is independent of the government or any political party.
The WTC undertook this study to pre-empt wider debate on the feasibility of a wealth tax by providing in-depth, evidence-based research. As previously reported, they published a series of detailed evidence papers ahead of the final report, all clearly driven by mounting questions over how the government might rebuild public finances in the wake of unprecedented public spending brought about by Covid-19.
The report rules out an annual wealth tax for the UK, but concludes that a one-off wealth tax could be an exceptional response to the crisis created by the pandemic, possibly termed ‘Covid Recovery Tax’. The Commission feels this would be a fairer, more efficient, and proportional way of raising significant revenue compared to increasing tax on work or spending.
This one-off tax would not be a substitute for existing taxes on wealth and the WTC recommends longer-term reform of inheritance tax, capital gains tax, and council tax.
What might a one-off wealth tax look like?
The report does not propose when (if at all) the government should introduce the tax nor the rate and threshold that should be used. Nevertheless, by way of illustration, the report estimates that a one-off levy could raise £260 billion at a rate of 5% on net assets worth over £500,000, payable at 1% p.a. over 5 years. This would be equivalent to a VAT increase of 6% or raising basic rate income tax by 9% for the same period. There would be 8 million taxpayers, of which 16% would be in London. At a threshold of £2m per individual, there would be 600,000 taxpayers raising £81bn in revenue.
Assets would need to be valued at their open market value after deduction of debt and the tax would be assessed per individual rather than on a household basis, with an option for couples to pool their assets. The ‘assessment date’ on which assets would be valued should fall on or even before the policy is announced, to forestall attempts to avoid the tax by fragmentation and migration, for example.
Since it is recommended to tax the worldwide assets of all UK residents (including ‘non-doms’), a ‘backwards tail’ based on residence in the years preceding the assessment date is also recommended so that tax could be charged on individuals who had recently left the UK, though not on new arrivals. Non-residents would only be taxed on UK real estate, including if held via a company.
The report also proposes that a comprehensive tax base should be used and it expressly recommends the inclusion of main homes, pensions and business assets, as well as savings and investments, second homes, and even gifts by parents to children under 18 at the assessment date. Including illiquid assets such as these raises the question of how some taxpayers will pay the tax. In cases of real hardship, a deferral mechanism could apply. Notably, this is one of the very few reliefs put forward in the report. The authors make it abundantly clear that exemptions and relief create opportunities for avoidance and distort behaviour and do not propose any relief for business or agricultural property, though make no recommendation in relation to the difficult question of heritage property.
Trust assets will also fall within the scope of a one-off wealth tax if the settlor or a beneficiary is UK resident in the tax year of the assessment date, or to the extent that the trust holds UK assets that are chargeable on non-residents. If a trust is within scope it will be taxable on the entire trust fund, regardless of whether or not the settlor can benefit, and wherever the trustees are resident. The liability will fall primarily on the trustees and only secondarily on the settlor.
The response to the economic fall-out from the pandemic is difficult to predict. It is impossible to say whether the government will consider the WTC recommendations now or in the future and whether any wealth tax would be as proposed or could become an annual levy. Last July, Rishi Sunak stated ‘I do not believe that now is the time, or ever would be the time, for a wealth tax’ but that was before a one-off tax had been proposed and circumstances were different.
Interestingly, Argentina introduced a one-off, Covid-related wealth tax in December on assets over 200m pesos (roughly £1.8m) at rates rising to 3.5% on Argentine assets and 5.25% on overseas wealth. However, this example cannot easily be compared to conditions in the UK. Government borrowing may be manageable when interest rates remain at such a low level. Several economists suggest that the government should treat Covid-19 debts as essentially war loans, paid off over such a long period that they are eroded by inflation. Whatever the eventual outcome the WTC report has certainly sparked a debate about the potential merits of a one-off wealth tax, particularly in the context of evidence of a growing wealth gap in the UK.