The Wealth Tax Commission has recently released a report recommending that if the government chooses to raise taxes as part of its response to the Covid-19 crisis, it should implement a one-off wealth tax in preference to increasing taxes on work or spending.
The report follows intensive research by a team of over fifty international experts on tax policy and practice. The three Commissioners are academics from the London School of Economics and Political Science (LSE) and the University of Warwick, and a leading barrister with long experience of advising High Net Worth Individuals.
It is worth noting that this report is independent of Government and its recommendations may well not be adopted or implemented. However, if its findings are taken at face value the Government may view its recommendations as its least painful option to increase revenue following the costly support programme pursued during the COVID-19 pandemic. Interestingly, the report found that public support is likely to be stronger for a wealth tax than for other potential tax raising measures and its implementation might be easier than has often been predicted of wealth taxes in the past.
Recommendations not Policy
The report clearly states that its remit does not extend to making recommendations for specific tax rates or thresholds but instead provides a range of examples. It also compares how far alternative taxes would need to go in order to raise the same level of revenue for HMRC. The report indicates that the increases in Income Tax, VAT or Corporation Tax that would be need to raise the same amount as a potential wealth tax would be viewed by many as potentially much more drastic.
To start with it’s worth reemphasizing that this report is independent of Government and its recommendations have not yet been adopted and may never be implemented. However, if the Government takes the report at face value, it may well find the case they make for a wealth tax compelling.
The main premise of the report is that IF the Government is looking to fill the hole in the country’s accounts through an increase in taxation, the best way to do this would be a one-time wealth tax brought in during unprecedented circumstances as a ‘COVID Recovery Tax’.
The key points and recommendations from the report are as follows:
Popularity & Support
Whatever the Government does to repair the country’s finances, they will undoubtedly want a solution that is supported by the public.
- Based on the commission’s research it would appear that a one-off wealth tax would be relatively popular with the public, compared to other tax raising options.
- In order for the public to support the wealth tax it will need to be credibly accepted as a one-time tax, not to be repeated. This is why calling it a COVID Recovery Tax is important.
- In order to raise the same levels of revenue via income tax , VAT or corporation tax, the measures required would to many seem more drastic (examples will be provided later).
Obstacles
In general, wealth taxes have rarely been used by Governments because they tend to be expensive to implement and were problematic for the ‘asset rich, cash poor’. However, the report does address these concerns reasonably well.
- Although this would be a one-off tax with a single ‘wealth tax assessment’, the tax itself would be spread over 5 years. A single assessment would significantly reduce the cost of administering the tax.
- Further measures would be included to allow the genuinely ‘asset rich, cash poor’ to pay over a longer period.
- The mechanisms for valuing most assets seem relatively well thought through and exceptions would be given to low-value items that are difficult to value.
Simplicity
Many tax proposals fall down due to complexity and myriad exemptions and reliefs. The report recommends making this tax as simple and as broad as possible.
- The tax would be liable on all UK residents with personal wealth above a set threshold.
- The assessment would encompass all worldwide assets including main homes, pensions, businesses and financial wealth, but minus any debts such as mortgages. Offshore assets would be included.
- The only exemptions would be for low-value chattels that are difficult to value.
No Notice
The report makes it resoundingly clear that the tax could only be successful (from the Government’s point of view) if no notice of the wealth tax is given prior to its implementation.
- The report recommends that the ‘Assessment Date’ for the wealth tax should be the same date as the announcement or slightly earlier.
- The valuation of all assets and debts would be as at this assessment date, though no tax would actually be due for at least 1 to 2 years. The payments would then also be split over 5 years.
Anti-Forestalling
The report again makes it clear that for the wealth tax to be successful, they would need to take every step possible to minimise opportunities for individuals to reduce their tax bill.
- Providing no notice of the wealth tax would be the first step, meaning any action that could be taken would need to be in anticipation of an announcement rather than as a reaction to it.
- Basing the tax on UK Residency over the years preceding the announcement of the wealth tax would make emigration unproductive as worldwide assets would still be liable to all those that were UK Residents in the prior years. Leaving after the announcement, or shortly before, shouldn’t make any difference.
- The report recommends that the tax be liable on worldwide assets. As such, offshore assets would be taxed in the same way as onshore assets making the movement of funds abroad unproductive.
- Genuine, outright gifts made prior to any announcement would reduce an individual’s wealth tax liability (though the recipient may well pay the tax instead depending on their level of wealth). However, gifts with a reservation of benefit would be added back into to the donor’s tax calculation.
- Any assets held within a trust would be assessed against the settlor with the tax payable by the trustees. It would appear there would be little scope to reduce a liability to the wealth tax via gifts into trust.
It’s worth stating again that these are simply the recommendations of the Wealth Tax Commission’s report, not Government policy and even if the Government do bring in a wealth tax, they may not apply it in exactly the way recommended in the report. As stated previously, the report doesn’t make recommendations in relation to rates and thresholds but it does give examples:
The report asserts that after adjusting for the cost of implementing the wealth tax and non-compliance, a 5% one-off wealth tax on an individual’s assets over £500,000 would bring in an estimated £260Bn. This tax would be payable over 5 years, so closer to 1% per annum for 5 years, but there would only be one assessment. A 5% one-off wealth tax on an individual’s assets over £2m would bring in an estimated £80Bn. It also gives examples of tiered rates across various thresholds.
The report states that in order for increases in income tax, VAT or corporation tax to raise £260Bn, the following increases would be required:
- A 9% increases in the basic rate of income tax, 20% to 29%, for 5 years.
- A 6% increase in income tax across all tax bands, from 20%, 40% & 45% to 26%, 46% & 51%, for 5 years.
- A 6% increase in VAT, from 20% to 26%, for 5 years.
- A 5% increase in Corporation Tax plus a 4% increase in VAT, for 5 years.
The Wealth Tax Commission’s Report
At 126 pages long, the Wealth Tax Commission’s report isn’t a quick read but should you wish to read it in full, you can access it via the following link:
Richard Fyfe is a Chartered Financial Planner and a Director of Fyfe Financial.