The question of whether the UK should have a wealth tax was last asked in 1974 when Sir Harold Wilson became prime minister. The Labour manifesto published in February 1974 included a statement under the banner of “Redistribute Income and Wealth” that “we shall introduce an annual Wealth Tax on the rich; bring in a new tax on major transfers of personal wealth; heavily tax speculation in property – including a new tax on property companies; and seek to eliminate tax dodging across the whole field”. This is certainly a quote of its time with the phrase “tax dodging” relegated to the history books but it does make you wonder if a wealth tax was not implemented in 1974, are the arguments for a wealth tax in the UK any more compelling today.
The Wealth Tax Commission (‘WTC’) published a report on 9 December 2020 based on a vast amount of research over the summer on this very question – should the UK have a wealth tax? They consider a number of tricky issues such as the tax base, liquidity and valuation to provide recommendations on what a wealth tax in the UK could look like. They have specifically avoided the question of rates and thresholds as this is a political question of who in the population should bear any wealth tax but they do deal with some other difficult tax and economic issues in their paper.
One thing we do know from the WTC report is that the idea of a wealth tax is popular. Mori polling undertaken as part of the WTC’s research over the summer found that there is general support for a one-off wealth tax provided that it is truly one-off and the rates and thresholds are set sufficiently high that they only tax the rich. An interesting question would be what level of capital those answering the question consider is needed to be described rich - it is likely that those with a modest home in the south east and a couple of decades of pension savings do not consider that the term applies to them. This may impact on the popularity of the tax depending on the level that thresholds are set.
Only a few countries across the world currently have an annual wealth tax. Norway is considered to have a successful annual wealth tax as it raises significant revenue and is fairly administratively straightforward. However, this is the only tax on capital that Norway have – no capital gains tax or inheritance tax – so it is not a fair comparison with the UK. Switzerland are also considered to have a successful wealth tax but without taxing capital gains and only levying inheritance tax in limited circumstances, again they are not a fair comparison. Whilst other countries such as France have recently limited their annual wealth tax to a tax on real estate only, Spain, one of the few countries to have wealth tax as well as CGT and IHT, has recently announced increases to their wealth taxes.
The suggestion in 1974 was “an annual wealth tax on the rich”. The WTC argue against an annual tax due to the administrative cost and complexity of annual valuations instead, suggesting that reform to some of the existing taxes such as inheritance tax, capital gains tax, income tax on investment income and council tax would raise similar amounts of tax revenues without the additional administrative burden. The governments of the 1970’s and early 1980’s had similar views which led to the reform of Capital Transfer Tax into the Inheritance Tax that we know today. Indeed the current Government has commissioned reports by the Office of Tax Simplification into both inheritance tax and capital gains tax, so any consideration of a wealth tax may well take place against this backdrop.
The WTC therefore have instead suggested a one-off wealth tax which they define as a one-time assessment of wealth with tax payment spread over a number of years. The wealth, rates and thresholds are set at the outset and are insensitive to future changes in circumstances of the taxpayer. They consider that a one-off tax eliminates distortive behaviours – the tax policy term for actions that taxpayers take in order to mitigate their exposures to certain taxes. There are other key advantages to a one-off tax when compared to an annual one – the main one being that you only need to value your assets once rather than every year. For listed securities, valuation is obviously available at a push of a button but for many other assets most taxpayers would need specialist valuation advice which can be expensive and therefore adds to the effective rate of the wealth tax.
The timing of the assessment to a wealth tax is also important. The WTC suggest that the assessment date should be historic, for example the day of the announcement or even earlier, again in order to reduce distortive behaviours. Whilst I can understand the economic efficiency argument of this approach, this would be a step change in UK tax policy and arguably retrospective in nature. In addition, given the recent sudden changes to people’s fortunes in the light of coronavirus, past wealth may be no indication of future riches.
Who is the taxpayer of a wealth tax is not as straightforward a question as it would seem. Do you tax a household or individual? Do you tax worldwide assets or just those in the UK? What about people living outside the UK who have invested capital in the UK – are they caught by a wealth tax? What about those that are temporarily living in the UK but happen to be here on the assessment date? How do you tax trusts? The Wealth Tax Commission have recommended that UK resident individuals are subject to the wealth tax on their worldwide assets – not dissimilar to Switzerland, Spain and Norway. They suggest an individual limit, perhaps of £500,000 but also a limit of £1 million for a couple or household.
If you are looking to implement a wealth tax, you must first consider what wealth is for this purpose. The Wealth Tax Commission are in favour of a broad base approach - taxing all assets including main homes, pensions and business assets. They argue that this reduces distortive behaviours and increases the economic efficiencies of the tax.
Applying a wealth tax to shares in family companies, for example, could have a significant impact on the future of this vital sector of the UK economy. In my experience, family businesses owners typically do not have substantial personal wealth and therefore any wealth tax would need to be funded from the business which will potentially have a knock-on impact on how the business uses its capital for investment and future growth. Including main homes and pensions could also be difficult from a liquidity perspective as well as potentially undermining public support for such a tax.
Globally annual wealth taxes tend to be at less than 1% and the Wealth Tax Commission have suggested that less than 0.01% would make the tax too administratively costly and at the upper bound range of 5% would lead to liquidity challenges and therefore taxpayers being forced to sell assets in order to fund the tax. They have therefore suggested that that the rate should fall within these ranges. The thresholds, the rate at which you are required to pay wealth tax, is not a straightforward question either and global comparisons are difficult as we only have a very small sample of countries that already levy a wealth tax and they do provide exemptions for certain assets such as main homes.
In my view, the decision of whether to introduce a wealth tax in the UK should not be taken in isolation and instead should be part of a broader review of how the UK taxes capital. Introducing a wealth tax without reform to capital gains tax and inheritance tax would potentially make the UK overall tax rates on capital one of the highest countries in the world. Given Brexit is fast approaching and the UK wants to be globally competitive, a wealth tax does not feel like the answer. Having said all of this, the tax revenues quoted by the Wealth Tax Commission on a one-off wealth tax are staggering at hundreds of billions of pounds so given that the Chancellor has a number of difficult choices ahead, he may decide that this is his least worst option, particularly given its apparent popularity with the general public.