The UK Wealth Tax Commission has published a follow up report to its earlier paper on this contentious subject.
The UK Wealth Tax Commission, has examined whether the time is right for a UK Wealth Tax.
The project’s initial paper covered some of the issues and background data (both UK and international). The Commission has now published a report which was presented by the authors (Arun Advani of the University of Warwick, Emma Chambers, a barrister and visiting Oxford professor and Andy Summers of the LSE).
At the time of the initial paper, the Office for Budget Responsibility (OBR) was forecasting a 2020/21 deficit of £298.4bn with pandemic support measures costing £132.6bn. Last month the OBR’s Economic and Fiscal Outlook raised the deficit figure to £394.2bn and put the tab for pandemic response at £280bn. It is that final number which seems to have set the goal for the UK Wealth Commission proposals, even though it stresses that it is “not endorsing any particular revenue target, or thresholds or rates”. The Commission re-iterated that the premise for their recommendations was that if the government decided that raising taxes was to be a part of their strategy for “repairing the public finances” then as well as reviewing all of the existing taxes, then the introduction of a wealth tax should be considered either to supplement, or as an alternative to, other tax rises.
The Commission proposes to collect the £262bn through a wealth tax over just five years, rather than adopt the protracted and gentle approach to financial retrenchment that eventually cleared the debt built up after World War 2. The basic principles of the proposed “one-off” UK wealth tax would be:
- It would apply to any individual who is UK resident (including non-doms) with net assets (including pensions but deducting debts other than student loans) in excess of a threshold. Calculations based upon various thresholds are illustrated, the lowest being £250,000. The Commission’s work focuses on a £500,000 threshold and emphasises the importance of including all assets to avoid unfairness, counter avoidance and maximise revenue. For example, just excluding the main residence would reduce the amount generated on a £500,000 threshold by 30%. Excluding pensions reduces the revenue by 54%.
- That £500,000 figure neatly matches the current IHT combined nil rate band thresholds (£325,000 nil rate band + £175,000 residence nil rate band). The Commission raises the possibility that couples would have the option to pool their wealth so that only households worth over £1m net would pay the tax. However, the Commission’s clear preference is to keep the tax at the individual level. On an individual level, a threshold of £500,000 would bring about 8.25m people into the scope of the tax, compared to the current population of higher/additional rate income taxpayers of about 4.7m.
- The Commission says that while it is not recommending a rate, to hit a £250bn revenue target requires a flat rate of tax of 4.8% on the net value above £500,000. In subsequent calculations this is rounded to 5%, raising £262bn. While the tax could be paid as a one-off lump sum for most people it would be payable at 1% a year for five years. There would be an additional charge for the instalment option which the Commission suggests should be a risk-free rate of return charged after the first payment. In today’s interest rate environment that rate would be close to zero, giving minimal incentive to choose a one-off payment over five instalments.
- The Commission recognises that there will be capital rich, income poor individuals who cannot pay 1% a year and there would be mechanisms to allow payment over a longer period than five years. The Commission suggest the test would be that:
- The wealth tax payable in a given year would exceed 20% of the taxpayer’s net income (after all other personal taxes have been paid); and
- It exceeds 10% of the combined total of their net income plus their liquid assets. (ie net financial assets).
- It is estimated that overall 7% of taxpayers would fall into this category, with the proportion rising with wealth – for those with wealth above £5m the estimate is 40%. The rate rises with wealth because that corresponds to rising business assets – the classic illiquid asset.
- As a one-off tax, payable in instalments, there would be only one valuation point, thereby avoiding the need for regular valuations that would come with a permanent tax. The valuation date would be on or shortly before the announcement of the tax, to limit the opportunity for forestalling and be based on open market values. The scope for adjustments to the initial figure, e.g. because of subsequent investment or other losses, would be strictly limited. Low-value individual items (<£3,000) would be exempt from tax.
- To counter the possible flight of the rich, the Commission proposes a ‘backwards tail’ for assessing UK residency so that anyone resident for more than four of the previous seven tax years is chargeable with a taper applying for those with less than three years’ residence.
- Subject to some detailed conditions for a trust whose settlor(s) are individuals liable to Wealth Tax (and thus alive), the entire trust should be subject to Wealth Tax, regardless of the nature of the trust or residence of the trustees.
- Pensions would be viewed as the top slice of wealth, so most likely to be taxable. Any tax charge would be based on fund value, with underlying investment valuations used for DC arrangements and cash equivalent transfer values (CETVs) for DB schemes. The actual payment of the tax could be deferred (with interest as above) until benefits are crystallised or state retirement age reached, whichever is sooner. The Commission envisages the tax could be paid from the PCLS when it is drawn and deducted by the scheme prior to payment to the member.
- There is no indication in the report how pensions in payment would be dealt with. Presumably these would be covered under the cash-rich-asset-poor provisions.
On implementation, the Commission underlines the need to limit scope for any forestalling by saying that “…the government should decide for itself whether a one-off wealth tax should be implemented, … and then (if so) announce it with immediate effect”. However, it also says that “The government should ensure that on the announcement date, the policy is specified with as much precision as possible”. The potential timescale to implement a tax would be “within 12 to 18 months after announcement,” including up to 9 months of drafting.
That is not to say the tax would start immediately. With the valuation date set, and legislation in being the Commission thinks a period of one or two would be required for valuations to be made and returns filed.
A Wealth Tax has already been dismissed by Boris Johnson and the Chancellor, a point made in the foreword to the Commission’s report. However, politicians of all stripes are known to change their mind. Inevitably the tax as envisaged would be a tax primarily on the South East of England – London, the South East and East Anglia would account for 48% of the revenue on the Commission’s calculations. It would be an interesting variant on the Prime Minister’s oft-repeated goal of levelling up.
In practice there is a question which the Commission did not address which is at the root of justification for a one-off £260bn tax: is clearing the pandemic debt quickly necessary? Analysis of the OBR’s recent Economic and Fiscal Outlook by several think tanks pointed to a black hole of about £40bn a year that would need to be filled, starting in maybe 2023. The Wealth Tax would produce about £50bn a year for five years and then, as a one-off, stop. It thus fills a pandemic expenditure hole but is not a panacea to the continuing fiscal issues facing an aging society.
Rishi Sunak already has two reports on capital taxes – IHT and CGT – sitting on his desk. Rather than adding a third tax that he has disavowed, he might prefer to overhaul that pair first and then work out what extra he has to find. We shall have to wait and see.