Covid recovery wealth tax
Matthew Duncan considers the implications of a proposed wealth tax to help fund significant shortfalls in the public purse
Mounting speculation about potential measures to address significant shortfalls in the UK public finances resulting from the covid-19 pandemic are being widely discussed and debated. A report published by the Wealth Tax Commission (WTC) in December 2020 considered the introduction of a UK wealth tax which, until now, hasn’t been seriously considered in the UK for nearly 50 years.
The WTC was established in April 2020 to assess whether a wealth tax would benefit the UK in response to the exceptional economic circumstances of the pandemic.
Discussions around wealth tax are also taking place against a backdrop of other recent proposals to significantly reform capital taxes in the UK, notably, the Office of Tax Simplification (OTS) reviews of both CGT and inheritance tax (see my article, Losses and gains, Solicitors Journal January 2021).
A UK wealth tax was first proposed immediately following the Second World War. It was also considered by the Harold Wilson government in the mid-1970s during the economic crisis of that administration. Neither proposal was implemented.
The present-day government borrowed a record £34 billion in the month of December 2020 as the pandemic continued its devasting impact on our economy. The 2019 Conservative election manifesto promised not to increase VAT, income tax or national insurance and to maintain corporation tax at 19 per cent.
With the Spring budget rapidly approaching (scheduled for 3 March 2021), the chancellor Rishi Sunak is in a difficult position. He must either break the election promises made or think of alternative ways of raising significant capital to fund the ever-increasing deficit.
In July 2020, the chancellor stated: “I do not believe that now is the time, or ever would be the time, for a wealth tax.” However, since then the pandemic has continued to rage; the UK’s economic deficit has more than doubled; and borrowing continues to increase at alarming and unprecedented levels.
Lord Gus O’Donnell, former cabinet secretary and head of the civil service, stated in his foreword to the WTC report that “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”.
The WTC recommended that if the government choses to raise taxes in response to covid-19, it should implement a one-off wealth tax in preference to increasing taxes on work or spending. A one-off wealth tax could raise substantial revenue and would be economically efficient.
The report recommended that in order to restrict the opportunity for tax avoidance, any one-off wealth tax should be implemented without prior warning and, perhaps, take effect retroactively.
The WTC did not recommend an annual wealth tax because – unlike a one-off wealth tax – an annual wealth tax would require regular reassessments of wealth, with the tax due changing as wealth changed. Instead, it recommended that the government should reform existing taxes on wealth, advocating major structural reforms in preference to minor tinkering.
The WTC suggests a wealth tax should be based on UK residency and the tax would be levied on worldwide assets of any individual UK resident, based on the existing statutory residence test rather than domicile.
Assets subject to wealth tax
All worldwide assets owned by a UK resident individual would be subject to the wealth tax, which would include main residences, pensions, businesses and assets held in trust.
Specifically, in relation to trust assets, the report recommends that all trust assets should be subject to tax on a worldwide basis if the settlor is UK resident, regardless of whether the settlor is excluded under the terms of the trust deed.
The trustees would primarily be liable for the tax charge, with the settlor having a secondary liability.
The assets subject to the wealth tax would be valued at open market value based on a hypothetical transaction between a willing buyer and seller negotiating at arms’ length.
The WTC makes clear in its report that it is not setting or recommending a specific rate or threshold for the tax levy, as it sees that as a decision for politicians. It does, however, give illustrative rates and provides an example based on a levy of 5 per cent on total wealth over £500,000 per individual.
At this level, £260 billion would be raised for the exchequer. The suggestion would be for the tax to be paid over five years. The report points out that using this threshold, 16 per cent of UK adults would pay the tax charge.
The WTC report will inevitably fuel the debate as to how the UK tax system should be reformed to raise additional revenue given the current crisis. Wealth taxes in other jurisdictions have not been universally successful – Ireland, Germany and France have all abolished theirs.
While there is undoubtedly wide public support for a wealth tax in principle, it is likely that those supporters are unlikely themselves to pay the tax.
However, if the threshold was introduced at a level of £500,000 per individual, which includes main homes and pensions, this would catch a significant number of people in the tax net who may not consider themselves to be especially wealthy.
The valuation of assets would no doubt prove challenging, in particular in relation to assets which are hard to value, such as private company shares and businesses.
The UK has a substantial and growing budget deficit. The WTC report provides a series of recommendations as to how that deficit could possibly be addressed. However, will the government be willing to introduce a wealth tax in any form, let alone one as dramatic as the WTC proposes?
If not a wealth tax, what are the alternatives? If the government wishes to raise significant revenue to reduce the deficit, it is likely it will have to break one or more of its election promises and raise VAT, income tax, national insurance or corporation tax.
The government may also turn its attention to CGT. Reforms could include an increase in the rates of CGT and align the rate with income tax up to 45 per cent. The abolition of business asset disposal relief and the replacement of the base cost uplift on death could be introduced.
The WTC report argues that reform of existing taxes would be a better route forward than an annual wealth tax. It also recommends both the alignment of CGT with income tax and the abolition of the CGT uplift on death.
The government’s response to the report is now eagerly awaited, although there is nothing currently to indicate that a one-off charge of wealth tax is imminent.
That said, the report did recommend that if it were to be introduced, it should be done so without warning. But I anticipate that other taxes are more likely to change and those changes may become apparent on the 3d March when the chancellor delivers his budget.
Matthew Duncan is a partner at Druces druces.com