The Wealth Tax Commission

The Wealth Tax Commission

The Wealth Tax Commission released their final report on UK wealth tax on 9 December 2020.

The Commission was established in Spring 2020 to provide in-depth analysis of proposals for a UK wealth tax for the first time in almost half a century. This comes in the scenario where the UK is in a precarious fiscal position, on the brink of a double dip recession and about to lose access to the European market on the preferential terms we’ve enjoyed for decades.

The executive summary of the report from the Commission can be found here. Our key takeaways are:

• A one-off wealth tax at 1% a year for five years could raise at least £260bn.
• This would apply to UK resident individuals with net wealth in excess of £500,000 – on an individual basis. It is suggested that a couple would own net assets in excess of £1m to fall within the charge.
• A one-off wealth tax would not distort behaviour – unlike a change in income or employment taxes, capital taxes or corporate taxes. It therefore should not encourage undesirable behaviour and should also be difficult to avoid by artificial means.
• An annual wealth tax is not recommended for the same reason i.e. it would encourage those undesirable behaviours.
• There are a multitude of recommendations for implementation to guide government policy:
• Apply based on tax residence i.e. it applies to UK tax resident individuals
• Apply a ‘backwards tail’ for recent departees from the UK to keep them in scope
• Give no exemptions for different asset classes – net wealth should be considered by reference to all assets and liabilities an individual holds
• Offer relief for those individuals newly arrived (or arriving) in the UK
• Provide hardship relief for those who are asset rich but cash poor – so that they do not have to e.g. sell their home to pay the tax due based on the value of said home.
• Alternatives to such a wealth tax would be to change inheritance tax, capital gains tax and council tax (which many expect may happen in 2021 anyway).    

As you would expect, there has been some significant commentary on this both within the industry and in the financial press.

The argument has been made in commentary and opinion pieces that the concept of the wealth tax is intrinsically unfair and morally objectionable. However, this probably, on its own, wouldn’t be enough to downplay the political swell that thinks a wealth tax has its place and that everyone should pay their “fair share”.

Some have also made the argument that the UK should not need to raise funds through a one-off levy because, despite the massive amounts of additional spend on dealing with COVID-19, plus the fact UK Plc has been running at a budget deficit for years, and we’re about to go through a potential no-deal Brexit, it is okay for the UK to fund all of this through additional borrowing. The reason being it’s currently cheap and easy to borrow.

There is a view, and we borrow from Chris Giles in the FT that: “Sensible income, expenditure, property and inheritance taxation can raise the revenues required to repair any holes in the public finances and redistribute income and wealth as society demands.” However, to replace the £260bn over five years the wealth tax is projected to raise, the increase to these other taxes would have to be substantial and, given the potential for inhibiting a hoped for recovery, this is not really feasible to the extent necessary to raise the same capital as this one-off, short lived wealth tax would achieve in addition to the current tax base. 

In respect of such a tax on wealthy individuals there is also always the argument that its introduction would lead to the individuals leaving the UK and therefore either avoiding the charge (note the ‘backwards tail’ mentioned above to catch these) or taking their wealth and contribution to the annual tax take with them. This predicted behaviour is actually very unlikely. Individuals who have created such wealth levels in the UK have significant ties to the country and their local community and this is especially relevant for those who would meet the wealth threshold by virtue of their residential property ownership or ownership of family businesses. It is therefore very likely that the majority of the ‘wealthy’ individuals captured by this tax would remain resident in the UK – but there will be some who would take the introduction of such a tax as an invitation to leave.

We do expect that there will be a rebalancing of certain capital taxes in the next Budget on 3 March, or at least over the remaining lifetime of the current government; an increase in council tax, an increase in the CGT rate to closer to the income tax rate, potential loss of the annual exempt amount for CGT purposes and a loss of access to certain benefits through the IHT system (CGT uplift on death, Business Relief on AIM listed shares etc) – all as covered by the recent Office for Tax Simplification or the All Party Parliamentary Group recommendations for CGT and IHT changes. You can find articles in respect of some of these recommendations on our news and insights page here.

For more information, please either get in touch with your local Azets tax advisor or read the full report here.