The self-appointed 'Wealth Tax Commission' has published a report recommending a one-off wealth tax on total wealth above £500,000 per individual (£1 million per couple), payable over five years. The authors of the report do not state what the rate should be, but note that if it were levied at 5%, £260bn could be raised for the government to address the rising costs of the covid-19 pandemic.
The tax proposed by the report would apply to all worldwide assets of UK residents, including main residence and pensions but subject to the deduction of debts such as mortgages. Trust assets would be included where the settlor is UK resident in the year that the tax is levied, regardless of whether the settlor is excluded under the terms of the trust deed, and the trustees would have primary liability with the settlor having a secondary liability. Non-UK residents would only be liable to wealth tax on UK real estate and not other UK assets.
We have previously addressed the possibility of a wealth tax since the onset of the pandemic in March 2020 when it became clear that there would be significant economic fall-out.
As we discussed here, wealth taxes must be implemented with caution. The report predicts significant revenue from the suggested one-off tax, but if wealthy individuals choose to leave a jurisdiction because of the introduction of, or threat of, a wealth tax, then there will be a significant impact on economic activity not to mention minimal revenue generated. The decisions by James Dyson and Jim Radcliffe to establish their factories outside the UK provide clear evidence of the fact that wealth creators will "vote with their feet".
The report fails to consider that a wealth tax could refer to a broad range of taxes. In May of this year, we suggested there were three possible options for a new wealth tax, in addition to an one-off tax: a property tax, a reduction in the annual capital gains tax allowance or increase in capital gains tax rates, and abolishing higher-rate tax reliefs for pension contributions. A change to the capital gains tax regime in particular has been the focus of recent attention following the Office of Tax Simplication's report, published in November, which we discussed here. We have also discussed other options for changes to taxation that the government may consider, including changes to income tax, national insurance, and VAT.
By considerably narrowing the scope of what can be considered a wealth tax, the report presents an extreme proposal which we do not consider requires much further consideration. Wealth tax as a concept is one that is worthy of serious consideration and one which could well have its place in a progressive tax system. It is a shame that the opportunity was not taken to consider a wealth tax in the context of a wider package in a way that could stimulate a reasoned debate about how to tax wealth and address the economic impact of the pandemic.
It's worth noting of course that the UK already has a wealth tax, albeit one that currently falls on occupiers rather than owners, the Council Tax. Focussing on an expansion of the Council tax, putting the liability on owners rather than occupiers, adopting a pre-existing valuation system and allowing the revenues to pass to Councils to fund the increasing burden of social care may have been a more practical way forward, but perhaps insufficiently radical for the purposes of this Commission.
France, of course, which has spent many years refining its wealth tax to balance the burdens of payment and administration with the revenues raised has an annual wealth tax applied solely to real estate valued above €1.3m at a rate of up to 1.5%. Simple.
It is important to note that the report was not commissioned by the government or any official body. Chancellor Rishi Sunak has clearly indicated he does not support a wealth tax and shortly this report will be consigned to history, to live on only in cross references in obscure academic papers.