Will we have a wealth tax?

Investment & Wealth Advice

Clare Munro, Senior Tax Adviser

In recent weeks the idea of a one-off wealth tax has had an airing in the financial press on the back of a report published in December that supports such a tax as a means to rebuild national finances. So, what is being proposed, does it have support and will it work?

What was in the report?

The first thing to say is that the report has been produced by a group of academics rather than having any official blessing. The findings are therefore aspirational rather than carrying any authoritative weight. In fact, the Chancellor, Rishi Sunak, rejected the idea of a wealth tax last summer, although, with a mounting deficit, he could be forgiven for changing his mind. The report quotes recent polls as showing popular support for a wealth tax and, while that might influence government at the margins, it’s likely that responders have voted for the tax they thought least likely to apply to themselves.
The report proposes that the wealth tax should apply to the market value of all assets on a specified day, including illiquid ones like your main residence and inaccessible assets like pension funds. Indeed, any wealth tax that did not apply to residences and pensions would be unlikely to raise any funds worth the effort. For pension assets the report proposes a deferral of liability until retirement, and a similar deferral scheme is mooted for residences so that no-one will, in theory, be forced to sell up. Both responses to the very real issue of the cash poor/asset rich gloss over the difficulties and anxieties this concept could cause for planning in later life, particularly if interest were applied to the liability over an extended period.

Are there any obstacles to the wealth tax?

One of the biggest obstacles to a one-off wealth tax is the need for a national valuation exercise, the likes of which have not been seen since the Domesday Book. Clearly valuation of quoted stock portfolios is available at the click of a mouse, but that’s not the case for unquoted businesses or even properties. The ‘open market value’ of a business is a notoriously subjective concept. The report suggests valuations be undertaken at company level by professionals in order to ‘reduce the scope for disputes’. At best this seems naïve and, at the very least, would provide a bonanza for accountants and a headache for the valuation teams at HMRC.

Will a wealth tax help?

A key question is perhaps whether a one-off wealth tax would plug the national deficit. The report suggests that ‘a one-off wealth tax payable on all individual wealth above £500,000 and charged at 1% a year for five years would raise £260 billion’. The final bill for the COVID-19 pandemic won’t be clear until the crisis subsides, but there’s no doubt that a £260bn injection would help. Given a total tax take for 2019/20 of £633bn,[1] it’s hard to see any other tax changes having a similar impact. However, it’s one thing to come up with numbers in the abstract, quite another to convert them into tax revenue. In particular, it’s by no means clear that the academic studies from which these figures have been sourced would correspond to actual taxable wealth when assessment day was announced.

So, will Rishi Sunak be imposing a wealth tax in 2021?

Superficially, the idea of a wealth tax looks attractive. The government gets a big cash injection into its coffers without breaking its promises not to increase income tax, VAT or NICs. Conversely, it would fall mainly on older people, the ‘lucky’ generation that has had access to affordable housing and defined benefit pension schemes. Yet it does appeal to a broad concept of ‘fairness’ requiring those with the broadest financial shoulders to pay.
However, the report ignores issues that would likely cause real hardship and glosses over the huge logistical exercise required to value, assess and collect the funds. Having established the infrastructure to collect a one-off tax, it would be surprising if any government stopped after one round. Indeed, the suggestion of 1% over five years sounds medium term rather than one off.
Finally, it’s worth looking to history to gauge the prospects for a wealth tax. The last Chancellor to consider it was Denis Healey in 1974. He concluded in his memoirs, ‘in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle’.[1] We might hope Rishi Sunak agrees.
The full report can be found here A-Wealth-Tax-For-The-UK.pdf (squarespace.com)

[1] The Time of My Life, Denis Healey, 1989


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