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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.

17th Dec 2020
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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.”

Main proposal

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).

Justification

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.

  1. 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.
  2. The payment would be spread over five years at 1% pa.
  3. 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.

Operability

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.

Conclusion

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.

Replies (13)

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By Montrose
17th Dec 2020 13:35

Just a few random thoughts.

1} What about unfunded employers' schemes - such as the Civil Service?

2] Valuation-no need for HMRC to have experts on chattel valuation[the CTO does not have the numbers of necessary experts}. Just build in a modern day version of Morton's Fork. Give HMRC the option of acquiring any asset for say 115% of the declared value.

3]Non UK property . Wealth tax is arguably not covered by Double Tax Treaties but how will say the US feel about a New York home [ owned by a US executive resident in the UK ] being subject to a UK wealth tax?

4] If enacted this would be a bonanza for UK Accountants

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Replying to Montrose:
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By Open all hours
17th Dec 2020 14:21

Don’t think we should hear any more about it until they have addressed your first point.

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Replying to Open all hours:
Hallerud at Easter
By DJKL
17th Dec 2020 14:31

Whilst not having read it discussions elsewhere suggested that pension schemes rights would have an actuarial valuation approach applied. (As part of my first ever audit I was required to review commutation figures re six final salary schemes, what on earth I was expected to spot, what level of critical thinking was expected that I could apply to the actuary's computation I have no idea, most of my "checking" was re the arithmetic, the life expectancy tables, gilt yields and discounts if transfers well before entitlement were like a foreign language)

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Chris M
By mr. mischief
17th Dec 2020 19:30

A better idea is to heavily tax the idle rich via inheritance tax, indeed drastically reduce the number of idle rich in the country.

0% first £2m
100% thereafter

No valuation issues other than those already dealt with on death. All UK property transfers at Land Registry would be potentially taxable events. £70 billion a year if done properly, deficit job done!

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Replying to mr. mischief:
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By AndyC555
18th Dec 2020 12:39

Do you know many people who became rich by being idle?

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Replying to AndyC555:
Chris M
By mr. mischief
18th Dec 2020 20:21

The entire royal family, Duke of Westminster, 50% or so of the offspring of self-made millionaires.

The good news for those whose inheritance is cut by 90% or more as a result of my tax plans is that the hard-working ones will simply go out to work and earn it all back again. Trebles all round at the bar!

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Replying to mr. mischief:
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By chrisowen
19th Dec 2020 12:53

I Agree with this in principle.
One of the reasons for the UK's inflated house prices is inherited wealth. Reduce this by increasing Inheritance Tax, will cause house prices to fall, so benefiting the lower paid and first time buyers who are struggling to find huge deposits.

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By Duggimon
18th Dec 2020 10:43

Rishi Sunak, whose wife is richer than the Queen, is against a wealth tax.

This is why we need to stop electing the wealthy elite and expecting them to solve the massive problems of wealth inequality in our society.

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Replying to Duggimon:
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By AndyC555
18th Dec 2020 12:37

"the massive problems of wealth inequality"

What are the "massive problems" with wealth inequality? If everyone except one person in a country earned £50k a year and that one person earned £50m, there would be wealth inequality but would you rather live there or in a country where everyone earned £5k a year and so there was no wealth inequality?

If pointing at someone who has more and shouting "look at him, look what he's got, it's not fair" is a massive problem then I agree we have a problem. With the person doing the pointing and shouting.

If someone sets up a business, creates jobs, makes our country wealthier and in doing so becomes personally rich, what 'massive problems' has he or she created?

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Replying to AndyC555:
By Duggimon
20th Dec 2020 09:07

AndyC555 wrote:

"the massive problems of wealth inequality"

What are the "massive problems" with wealth inequality?

Your examples are so far off the actual society we have it’s a pointless choice, both options are utopian compared to the truth of it. On one hand we have hundreds of thousands of people working full time unable to feed their families, on the other we have https://www.theguardian.com/technology/2020/dec/19/ten-billionaires-reap...?

That’s a massive problem in my mind. Nobody needs billions of pounds and billionaires can’t exist without being propped up by people living in poverty.

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Replying to AndyC555:
Chris M
By mr. mischief
21st Dec 2020 07:34

My answer to your last question is they've solved problems, not created them. But most of them - by no means all - then create a problem by just leaving all of that wealth to their offspring who have done nothing to earn it. Over the generations in my view this creates a massive problem, namely an indolent rich class who have a ridiculously high sense of entitlement in comparison to their abilities and talents.

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By North East Accountant
18th Dec 2020 13:31

What an idiotic idea.......... hence it's odds on that it will happen.

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By Marlinman
19th Dec 2020 02:37

Crazy idea and would force a lot of people to leave the uk, taking their money and investments with them. Including main residence and pension funds is madness - how would the retired find the money?
The big problem is we are already taxed to the hilt and there isn't much scope to find new taxes. Cutting waste such as HS2 has got to be the way forward.

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