Wealth taxes hit the headlines again last month following the publication of a report by a group of academics which recommended the government introduce a 1% tax on all assets (including pensions and property) an individual owns above £500,000, or above £1m for a couple.
They argued that such a tax would be akin to ‘ripping of the plaster’ with one short sharp tax to repair the public finances post-Covid to the tune of £260bn over five years, with the added bonus of rebalancing wealth inequality in the UK.
The proposals are certainly divisive. But regardless of whether you consider them to be daylight robbery or a necessary evil in a post-Covid world, there are two reasons which suggest the tax could be a non-starter and that the taxman won’t be coming after your clients’ wealth in a hurry.
Designing policy is not only about what a government believes is right, but about what it believes is electable, and wealth taxes are unlikely to be a natural vote-winner.
Polling from YouGov shows people consistently favour taxing income over wealth. Around 60% deem it ‘fairer’ to tax income, while just a quarter believe taxing wealth is more reasonable.
And when you ask Conservative supporters, the picture becomes even clearer as only 15% believe wealth taxation is the fairer option.
Turkeys won’t vote for Christmas, so both the Chancellor and the Prime Minister have made it clear that they do not support a wealth tax, and when Labour hinted their support for the tax over the summer, the Prime Minster retorted that “we need jobs, jobs jobs not tax, tax, tax”.
Backbench MPs are even less likely to support the proposals given they will bear the brunt of their disgruntled constituents. A backbench backlash would come calling.
Then there is the media. When the previous opposition leader proposed a land value tax, the papers were awash with headlines talking of a “cash grab”. Today’s wealth tax debate is no different.
Ah, you could say, but won’t the additional costs of Covid-19 tie the hands of the Chancellor and force him to introduce such a tax that will, after all, be popular with young voters and the newfound Blue wall? There is some logic to this, but even with all the political will in the world, a number of practical challenges remain that would mean implementing the tax would be fraught with difficulties.
The proposals will impact a huge number of moderately affluent people, who will all have to value their entire wealth, including their house. Getting so many properties valued fairly and accurately would be a huge challenge.
Similarly, how would one value an insurance or pension policy which may have cost a significant sum and pays a sizeable amount, but which isn’t sat as a capital sum in someone’s account? And where somebody has substantial wealth in a business it would be hugely problematic to value fairly in many cases, and could cause other complications. How too would the government go about valuing defined benefit pension pots?
All of this complexity adds time to the policy making process. An earlier report from the same group of academics admitted that the implementation challenges of a net wealth tax would be “unprecedented…in the history of HMRC” and considering the Treasury’s usual timeframe for policy changes, with the additional complexity of a wealth tax, it could take five years to go through the policy design process and through Parliament to become an Act. This is also assuming the necessary government support exists to push it through.
What might happen to tax?
It is true that the Chancellor faces a difficult balancing act in the months ahead as he tries to bring the nation’s finances back on a sustainable footing. A list of unpleasant treatments are at his disposal, including public sector pay freezes, cuts to services, slashing welfare, raising income taxes, or increasing taxes on businesses.
It is also true that wealth is held in vast quantities by a relatively small part of the population. So the Chancellor won’t be able to overlook that if he has to add a penny onto income tax, of further reduce public spending.
But for the reasons outlined above, it is likely that in seeking the share the pain, the Chancellor will seek to raise the tax take from wealth by raising existing wealth tax rates, such as CGT and IHT, or freezing threshold so that revenues gradually rise through inflation. CGT appears most ripe for reform, given the OTS has already prepared a menu of options for the Chancellor’s consideration.
While it is unlikely the taxman will be coming for your wealth through a new levy on wealth anytime soon, we do expect the tax landscape will become less generous in general, and certain pre-existing taxes on wealth, including CGT and IHT, could find themselves in the Chancellor’s crosshairs in the months to come.