A wealth tax is a slim possibility
The solution to paying down government debt could be a new wealth tax, the Wealth Tax Commission has argued. Philip Fisher explores whether it will ever reach the statute books.
Every few years, a group of wise souls decides that the only way to make society fairer and balance the budget is to introduce a wealth tax.
The Wealth Tax Commission has recently been established with that goal in mind. To further its aims, the commission has published a carefully considered 126 page report, penned by two full-time academics Arun Advani and Andy Summers and barrister/academic Emma Chamberlain.
As former cabinet secretary Lord O’Donnell announces in the foreword to the report, its chances of coming to fruition currently seem negligible given that Chancellor of the Exchequer, Rishi Sunak, stated in July, “No, I do not believe that now is the time, or ever would be to time, for a wealth tax.”
The authors believe that rather than increasing income tax, VAT or capital gains tax, the simplest way of raising significant amounts of revenues that will be much-needed given record levels of government debt is to introduce a wealth tax.
While many different scenarios are explored, their proposal is to implement a one-off 5% charge tax on individual UK residents.
Using a specific reference date, all assets (including those settled into trusts) worth more than £3,000 would be aggregated and all debts deducted in ascertaining the taxable fortune but a base amount would be exempt
If the exempt amount was £500,000, the tax would raise an estimated £262bn (8.246 million potential taxpayers), with an exemption of £2m, the revenue would be £81bn (626,000 potential taxpayers).
The authors conclude that “a well-designed one-off wealth tax would:
- Raise significant revenue in a fair and efficient way
- Be very difficult to avoid
- Work in practice without excessive administrative cost”.
The tax must:
- “Be credibly one-off and not forestalled [avoidable]
- Apply to all residents (including ‘non-doms’) and recent emigrants
- Have a comprehensive tax base including all assets except low-value items
- Value assets at their open market value (OMV)
- Allow for deferral of payment where the taxpayer is liquidity constrained
- Avoid special exemptions and reliefs”.
Deferral of payments
The authors recognise that many individuals have paper wealth but no liquid means of paying taxes. Therefore, three mitigating measures are suggested.
- The tax due in respect of pension wealth would be payable out of the pension lump sum on retirement, for those not yet at state pension age.
- The payment would be spread over five years at 1% pa.
- Any taxpayer who would still have difficulty paying could apply for a further deferral, under a specially devised statutory deferral scheme.
Readers might reasonably observe that a 1% charge each year for five years is not what the man in the street would regard as one-off.
It is noted that the Wealth Tax Commission believes such a plan could be operated in practice without too much difficulty, although the writers admit that there might be a four-year lead time i.e. taking implementation beyond the next general election.
While they address valuation issues, in the real world these could be almost insuperable. By requiring taxpayers to value every asset worth over £3,000 that they own and those a little below to be on the safe side, this imposes a massive burden, not to mention considerable cost.
Take the simple example of somebody owning a £2.4m property inherited from his or her late parents.
They might naturally own a car, carpets, a fully fitted kitchen, a couple of family heirlooms and maybe even a much-loved artwork. These days, even a TV might need to be included.
It is hard to imagine that any reader would not be horrified at the prospect of having to obtain valuations for each of these items, aware that if this was not done properly, they could face significant penalties and other problems as a result of inadvertently avoiding or evading tax.
At the other end of the equation, HMRC would also need to employ a whole army of valuers with differing skills to check that amounts returned (presumably via self-assessment) were not understated.
Let us take the example a step further and assume that the total value of the estate, perhaps including some savings or liquid investments was £2.5m. After deducting a £500,000 exemption, the taxpayer would face a liability of £100,000, with £20,000 payable over each of five years. This is far from negligible and could well require the sale of assets or negotiation of a mortgage or bank loan.
For anyone with an interest in an unincorporated business, valuation issues will inevitably be far more complex.
There can be no question that the Wealth Tax Commission has prepared a comprehensive and detailed report making the case for a one-off wealth tax.
However, given practical difficulties of implementing the plan, a four-year lead time and the lack of enthusiasm shown by the current Chancellor, readers may feel that they and their clients can sleep peacefully without worrying too much about the theory being put into practice in the foreseeable future.