By Paul Fairbairn, partner at Cripps Pemberton Greenish – Many commentators and market participants are, in large part due to the Covid-19 pandemic, eagerly trying to predict the government’s next move to hike taxes that would recoup the money lost through necessary initiatives like the furlough support scheme.
One suggestion that has surfaced is the introduction of a ‘wealth tax’ – a one-time tax levied on the value of wealthy individuals’ combined assets. Discussion around a wealth tax of this sort came to a head on 9 December when the ‘Wealth Tax Commission’, an organisation (not affiliated with UK government) made up of academics, professionals and policymakers, published a piece of academic research. This recommended a one-off wealth tax as an effective way to restore national coffers that have been depleted by the pandemic.
The questions this raises include – what does the research say? And is it something that wealthy individuals and their advisers should be concerned about?
The key proposals of the research
The report proposes a one-off wealth tax of 5 per cent payable over 5 years at 1 per cent a year on all individuals with wealth over GBP500,000. It suggests that the wealth should be calculated net of mortgages and other debts. Pensions would also be classed as part of an individual’s wealth, and taxed accordingly. And finally, the GBP500,000 figure only applies to individuals and their assets – where assets are jointly-owned by a couple, the tax wouldn’t apply unless they totalled in excess of GBP1 million.
The authors of the report predict that this one-time levy would raise roughly GBP260 billion for the UK government.
Is it something to worry about?
In short, no – not yet.
Firstly, this wealth tax was not the only tax that the authors of the report looked at. They also provided comments on other taxes that could raise a similar amount over a similar timeframe (for example raising income tax rates, or corporation tax and VAT). The report merely advanced positive arguments for a wealth tax. The authors suggest that it would not distort behavior in the way that alternative rises might, such as discouraging the generation of income or disincentivising international businesses from setting up shop here. Furthermore, from the government’s perspective it would be much harder for individuals to avoid this tax, as it is a one-off event based on wealth at a past point in time.
I cannot stress the point enough that this is just a piece of academic research. It is tempting for some commentators to make a lot of noise around the release of a report like this. Given the caliber of its authors it certainly should not be completely discounted but there is still no suggestion that a wealth tax is likely to be introduced as a result of the report. The Chancellor himself even said earlier this summer that he does not believe now is the time, or ever would be the time, for a one-time tax on individual wealth.
What, if anything, should you do?
Even if a tax like this were taken seriously by the UK government and introduced, it is questionable whether there is anything a wealthy individual or their advisers could do. After all, one of the key reasons a one-off wealth tax was suggested in the research was because it is apparently hard to avoid. The only way to avoid such a tax would be to have taken steps in advance to ensure you did not have wealth here and were not a UK-resident. Given it is a snapshot of the past, it is not the easiest task for anybody who cannot travel in time. Furthermore, the cost of moving and at the same time realising assets to take with you is likely to exceed the tax cost of staying.
Ultimately, all of this is not something to be too concerned about. This report is little more than a hypothetical scenario that the government has already dismissed, and one should avoid making knee-jerk reactions. On the whole, it’s never a good idea to take action in response to a tax that is merely rumoured to be a possibility.
I would suggest individuals and their advisers hold back from any action now. If rumours of a wealth tax continue to build then this can always be reviewed.