On 9 December 2020 The Wealth Tax Commission published its final report, strongly endorsing a one-off wealth tax as a means to raise substantial revenue for the Exchequer.
No doubt in these times of economic strain, a one-off wealth tax would be a source of revenue for the Government. The report suggests that a one-off wealth tax payable on all individual wealth above £500,000 and charged at 5% would raise £260 billion. Similar revenue could be achieved over a similar period by increasing the basic rate of income tax by 9p or increasing all income tax rate bands by 6p.
In contrast to other tax changes, the report advocates that a one-off wealth tax would minimise abusive behaviour. This is because it likely to be calculated based on wealth at either a past point in time or wealth owned at the date that any such policy is announced. This would leave little (if any) time for individuals to plan in respect of the tax charge. A rise to income taxes, however, may reduce incentives to work; a reform to capital taxes could reduce investment and/or lifetime gifts; and increasing corporation taxes may encourage business owners to reduce taxable profits.
Whilst we can certainly see a number of arguments in favour of a one-off wealth tax, it seems, at least to us, that there are a number of obstacles to overcome in order to make it fair (not least, the valuation question). There is no doubt a reason why it has been 50 years since such a tax has seriously been considered in the UK and we might question why our neighbours across the Channel recently sought to abolish their own version of the wealth tax.
The Report’s Recommendations
The defining feature of a one-off wealth tax is that it would be a one-off exceptional response to a particular crisis. The report suggests that the tax should have a broad base and that it might apply to personal wealth above £500,000 per person, or £1million per couple.
The report proposes that:
a) the tax should be levied on the worldwide assets of any individual resident in the UK on the effective date. The report also suggests that the tax could have a “backwards tail” whereby an individual could be liable for the tax if they were resident in the UK for at least four out of the previous seven years, even if they were not UK resident on the effective date;
b) all property should be included in the tax base, both tangible and intangible assets. This means that not only homes and personal assets would be included, but shares, intellectual property and business goodwill. For practical reasons, low-value items (less than £3,000 per item) could be excluded;
c) trusts should be liable to the wealth tax on the entire trust fund if the settlor or beneficiary was resident on the effective date; this is regardless of whether the settlor can benefit from the trust and regardless of the residence of the trustees;
d) non-resident individuals should only be liable to the tax on UK-real estate assets, but this should extend to real-estate held indirectly through an offshore company;
e) assets should be valued at their “open market value,” being the price which the property might reasonably be expected to fetch if sold to an unconnected third party; and
f) payments could be deferred by those who may face liquidity issues (i.e. those who may be considered “asset-rich-cash-poor”).
The report does not recommend an annual wealth tax. It acknowledges that administrative issues are likely to cause the largest stumbling block to such an ongoing tax and that a reform of existing taxes (such as to IHT, CGT, income tax and council tax) are likely to be more straightforward in the long-term.
Like the recent OTS report on CGT reform, the Wealth Tax Report only contains recommendations and has no political backing.
In July, the Chancellor was firmly against introducing a Wealth Tax but, since then, the predicted deficit as a result of COVID-19 has doubled. Faced with a tough dilemma of how to raise UK revenue, maybe the words of Lord Gus O’Donnell will ring true: “at a time when there appear to be no good options left, it is worth keeping an open mind about the choices that lie ahead”.
Although a one-off tax wealth tax may raise significant revenue, it will not address ongoing deficit and therefore is perhaps inappropriate at the current time. In addition, it seems an unlikely policy choice for a Conservative Government.
2020 was not the year that anyone predicted and the outlook for 2021 is anything but clear. However, we all know that three things in life are certain: birth, death and taxes. Whilst we cannot comment on the first two, 2021 is looking more and more likely to bring a sea of change to our tax system and taxpayers may wish to consider its possible implication.
Please contact a member of the Private Wealth or Tax department to discuss how these changes might affect you.