How best to steer the UK’s public finances out of the black hole left by the Coronavirus crisis? It’s a hot topic in political circles and elsewhere.
While the Prime Minister and the Chancellor have previously distanced themselves from the idea of a wealth tax, these are unprecedented times, and it is widely acknowledged that tax rises are going to play a part in rebuilding the public finances. It’s against this backdrop that the Wealth Tax Commission have published their report, authored by an independent group of academics and tax experts, looking at the possibility of a wealth tax in the UK.
The report concludes that, while an annual wealth tax would be unworkable in the UK, a one-off wealth tax, correctly designed, would be a better way of raising revenue than raising other taxes, such as income tax or VAT. A flat rate of 5% on all assets over £500,000 could raise over a quarter of a trillion pounds, to be paid over a five-year period, at a rate of 1% per annum – a considerable amount for a government in need of extra revenue. But will it be palatable to the public?
The report suggests that a one-off wealth tax should include all assets worth more than £3,000, valued at their open market value. It would include main homes, pensions, business assets, savings, and other investments, net of debt. Spouses and civil partners would be allowed to pool their assets, to access a higher limit of £1 million per couple. There are no exemptions proposed for business or agricultural property, but the report does not give any suggestions as to whether heritage properties should be exempt.
The proposals would allow for deferred payments in respect of pension assets until retirement age and for those who are ‘asset rich, but cash poor’ to allow liabilities to be more easily managed and paid.
It is envisaged that all residents would be subject to any such wealth tax, including non-doms, who would be subject to a ‘backwards tail’ based on residence in the years preceding the single assessment date for the wealth tax. This could mean that an individual who had recently left the UK could have the tax imposed on them, whereas a newly arrived individual would not. Non-residents could also be taxed on their UK real estate, whether owned indirectly or directly.
For wealth held within trusts, the tax would be applied to them as separate entities, and they would fall into the scope of the tax if the settlor was resident in the UK at the time of the assessment date, in certain instances where a beneficiary was UK resident, or if the trust assets were situated in the UK chargeable on non-residents. The proposals would make the trustees primarily responsible for the tax liability, and would make all of the trust fund assets subject to the tax, irrespective of where the trustees are resident, whether the trust is revocable or irrevocable, and whether or not the settlor can benefit.
While these proposals may seem concerning for some, it should be noted that the government is not bound to adopt any of the recommendations in this report. It was prepared as an independent study into the possibility of a wealth tax in the UK, and so it remains to be seen whether any of these proposals will be implemented.
What is clear is that the future of tax is up for debate right now, and solutions are needed. The Treasury Committee is reviewing tax after Coronavirus and the Office of Tax Simplification recently reporting on both capital gains tax and inheritance tax. Change is on the horizon, perhaps starting in the 2021 Budget. But if it’s to be a wealth tax, and if it’s to achieve the primary goal of helping balance the books, then it must be fair, proportionate and recognise the importance of wealth creation to economic growth.