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Wealth Tax Commission proposals – targeting the broadest shoulders or a grand fiscal heist?
“Taxation is theft, purely and simply even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match” said Murray Rothbard, a non-orthodox economist and libertarian.
One would imagine that Rothbard would view the proposals of the Wealth Tax Commission (“WTC”) as being the equivalent to Ronnie Biggs and his mates newly found interest in train timetables back in 1963.
Indeed, today’s newspapers get into the spirit of Rothbard, reporting “raids” on pensions and properties.
It is easy to write off a wealth tax.
But, if one sets aside the emotions, and agrees that the Government needs to raise significant tax revenues, then does the WTC make a compelling case for a one-off Wealth Tax?
Who is the WTC?
Firstly, unlike the Office for Tax Simplification (“OTS”), the WTS is simply a self-formed group of individuals. It includes professors from the University of Warwick and London School of Economic, professional pollsters plus tax barristers such as Emma Chamberlain OBE.
Unlike the OTS’ report, this work has not been commissioned by the Treasury. However, it has received funding from the Economic and Social Research Council (“ESRC”) .
The WTS has conducted substantial research into the issues around wealth taxes, including how they operate around the world and the public’s attitude to wealth taxes. Indeed, this report is not only weighty in its own right – but is supplemented by a number of other substantial research papers available on its website.
It is, objectively, an impressive body of work.
What is a wealth tax?
Don’t we already tax wealth?
Of course we do. We tax transfers of wealth in lifetime and death through Inheritance Tax (“IHT”). We tax the capital return from wealth through Capital Gains Tax (“CGT”). We tax income returns from wealth through income tax.
Further, we also commonly tax property purchases through Stamp Duty Land Tax and also we have (less commonly) the Annual Tax on Enveloped Dwellings (“ATED”) where one broadly lives in a property that has been ‘enveloped’ in a Company.
However, we do not have a tax that is simply levied because you have wealth.
Further, the report states that the current suite of wealth taxes is “dysfunctional”. I think describing the UK tax system as dysfunctional is somewhat polite. It is an abomination. The recent OTS report on CGT highlights some of the problems – albeit I don’t think its solutions bring much to the party in terms of simplification (perhaps they raise revenue thinly disguised as simplification).
Firstly, it is clear that the WTC prefer a one-off wealth tax rather than an annual tax. As such, we will concentrate on that proposal here.
It should be noted that the WTC clearly state that they are NOT suggesting any particular rates or thresholds. That is for the Government. However, they do set out some illustrations:
Based on a rate of 5% (spread over 5 years) the first of these would reportedly raise a stonking £260bn, which is broadly the projected COVID blackhole. In respect of the second of these, then the tax take would be £80bn.
This is a huge amount of money. This is illustrated by what alternative changes might be necessary to raise £250m over 5 years:
This would cause the pips to squeak!
Who is taxed?
Under the proposals it would be individuals, rather than couples, that would be taxed. However, it is suggested that a household might want to jointly elect to have their wealth taxed jointly.
The wealth tax would apply based on a person’s residence. It is proposed that there is a residence tail such that, if one was resident, say, for 4 out of the previous 7 tax years, then one would be subject to the tax even if one had left by the time it was enacted.
Of course, this would limit the ability to take pre-emptive action. However, this could be unfair on someone who, say, had been in the UK for a relatively short period of time, but has left the UK and has no intention of returning by the time the levy is applied. It may be unjust that such a person is responsible for helping the UK economy out of a COVID shaped hole – as in all likelihood they will be suffering ‘increased’ taxes in their new jurisdiction as a result of virus related economic problems there!
Proposals are made in relation to trusts. Broadly, the assets of a trust would be within the wealth tax where the settlor (the person who established the trust) was resident in the relevant (wealth tax) year or a beneficiary is resident in a particular year. It is also proposed that a trust would be subject to the wealth tax where it holds UK real estate.
What is taxed?
The proposal is that ALL wealth above the thresholds would be taxed.
The report is very clear that ‘exceptions’ and ‘exemptions’ should be resisted to keep the tax base as wide as possible.
This is a bold (and potentially politically incendiary) proposal. The proposal is that wealth in pensions, main residences and businesses would be up for grabs.
It is stated in the report that 40% of the UK’s wealth is tied up in pension schemes and, as such, it would adversely affect the success of a wealth tax where this source was excluded.
However, this could easily bring in healthy public sector final salary / defined benefit schemes once they have been capitalised. This might be a political bomb.
Further, the inclusion of main residences in the proposal will be difficult one. It would also go against the grain of the ‘Residence Nil Rate Band’ which was introduced for IHT purposes to prevent main property rich, cash poor people being inadvertently brough in to IHT (and presumably foced to sell the family home).
The obvious problem of ‘asset rich, cash poor’ suffering sizeable tax bills which they cannot pay is identified in the report. Rather than having to pay 5% in one hit, a ‘standard’ five year deferral would be allowed. Further, the wealth tax on a pension may be payable only when benefits are drawn (eg, could be paid out of the tax-free lump sum).
It should be stated that it is net wealth, so only after taking into account debt, that will be taxable.
It is stated that the roll out of a levy should not be consulted upon or pre-announced.
This would reduce the ability to plan around the imposition of a wealth tax where the effective valuation date was on, or shortly before, the announcement.
This makes sense.
As a method of raising substantial amounts of revenue, then the proposals set out are likely to be compelling as a one-off emergency measure.
However, if one criteria for a wealth tax is that it is imposed on the wealthy, then a threshold of just £500k net wealth (including main residence, pension scheme and business interests) feels well below what most people might think a wealth person looked like.
Both Boris and Mr Sunak have set out they are not in favour of wealth taxes. These proposals are likely to be too bold – all of the three asset classes mentioned above are likely to be ‘off limits’ from a political perspective.
As such, and although it will not raise a fraction of the revenues set out in this proposal, it seems more likely that the OTS report will be adopted in some fashion and a few pence might be added to some of the income tax bands.
Indeed, it may well be the case that this report demonstrates to Tory backbenchers that an alternatives to an alignment of tax rates might be a wealth tax on their personal and trust assets. As such, the OTS CGT proposals might suddenly look much more palatable!
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