The UK Wealth Tax Commission has published a detailed report on the principles, design, and delivery of a potential UK wealth tax. Their report recommends a one-off wealth tax, charged on total net assets with payment spread over five years, alongside a major structural reform of existing taxes. This report was not commissioned by the Government and there has been no suggestion so far that a wealth tax will be introduced under the current Government. <\/p>\n\n\n\n
The report notes that in July 2020, the Chancellor stated \u201cNo, I do not believe that now is the time, or ever would be the time, for a wealth tax\u201d. It is likely to hold less weight than reports commissioned by the Chancellor, for example recent reports by the Office of Tax Simplification (OTS) on IHT and CGT simplification. It is, however, well timed, at a moment when the Government faces the problem of a large deficit and the fairest way to share the cost of the COVID-19 crisis, alongside manifesto commitments not to increase income tax, VAT, or National insurance. <\/p>\n\n\n\n
What is a wealth tax?<\/strong> <\/p>\n\n\n\n A \u2018wealth tax\u2019 is broadly a charge on a person\u2019s assets, in contrast to the majority of taxes that are charged when cash or assets move between parties. <\/p>\n\n\n\n The report considers two main options: an annual tax, and a one-off tax. The advantages of a one-off tax include that it would not distort taxpayer behaviour, as once implemented, future gifts or changes in residence would not affect the taxpayer\u2019s liability, wealth only needs to be valued once, and administrative costs would be proportionately lower. In the view of the authors, an annual tax would be much more difficult to deliver effectively and would only be justified if the aim was specifically to reduce inequality by redistributing wealth. <\/p>\n\n\n\n The report concludes that if the Government chooses to raise taxes as a response to the crisis, it should implement a one-off wealth tax in preference to increasing taxes on work or spending. An annual wealth tax was not recommended, but the report does strongly suggest that existing taxes on wealth, such as IHT, income tax on investments and CGT, should also be significantly reformed. <\/p>\n\n\n\n A one-off wealth tax<\/strong> <\/p>\n\n\n\n The more detailed proposal for a one-off wealth tax is that it is charged on an individual\u2019s net assets, being total assets minus debts, and on an individual rather than household basis, although couples could be jointly assessed. The report does not recommend exemptions, to avoid unfairness such as between those owning a mortgaged home, and those with the equivalent in cash saving for a home. Main residences and pensions would therefore be included, with the only exclusion being for low value items such as personal possessions \u2013 a threshold of \u00a33,000 per item was suggested. <\/p>\n\n\n\n It would be levied on assets at their open market value, creating a considerable issue of valuations. The report goes on to consider how various assets could be valued. <\/p>\n\n\n\n In principle, it would apply to the worldwide wealth of UK residents, regardless of an individual\u2019s domicile position, and to UK real estate owned directly or indirectly by non-residents. To reduce the arbitrary nature of applying a tax to those in the UK only for one year, a \u2018backwards tail\u2019 would be applied. The example given was that only those resident in the UK for four out of the seven previous tax years would be chargeable, even if they had since moved overseas, and those newly resident in the UK, for fewer than three years, would pay a reduced rate. This could tail to nil for those who first arrived in the year of assessment. <\/p>\n\n\n\n The report also recommends that gifts from parents to minor children should be assessed as part of the parents\u2019 wealth, and that the value of trusts settled by UK residents, using the wealth tax definition of residence, should be taxed, though that portion of tax could be paid from the trust funds. Various more specific recommendations were made in relation to trusts, including those not settled by a UK resident. <\/p>\n\n\n\n The authors of the report have refrained from recommending thresholds and rates, as they believe this is a matter for the Treasury, but, as set out below, have calculated the potential tax that could be raised using different rates and thresholds. <\/p>\n\n\n\n Paying the tax<\/strong> <\/p>\n\n\n\n The authors recognise that payment will be difficult for those with illiquid assets. They have three solutions: that it is payable over five years, that the portion relating to a pension should be paid from the lump sum on retirement, and that there should be a system to allow taxpayers to apply for further deferrals. <\/p>\n\n\n\n Introducing a wealth tax<\/strong> <\/p>\n\n\n\n How if at all to introduce a wealth tax remains a question for the Government, but the report recommends that any one-off wealth tax should be announced without prior warning to prevent any planning to reduce exposure to the tax. This would however also prevent public consultation and it is difficult to envisage that such a major imposition of new tax would be introduced without the consent of the electorate through a general election. <\/p>\n\n\n\n A one-off wealth tax does not come without challenges including valuation difficulties. It is insensitive to subsequent changes in wealth, and impacts disproportionately the old more than the young for the same level of wealth. Finding the money to pay the tax may require selling assets or extracting money from a business, which could in themselves create additional tax liabilities. <\/p>\n\n\n\n It would however raise a large amount of tax in a short amount of time. The report models detailed projections of how much tax might be raised, noting that a 5% charge on every individual\u2019s wealth above \u00a3500,000 would raise \u00a3260 billion. A threshold of \u00a32 million would yield \u00a380 billion. In contrast, they noted that raising \u00a3250 billion from income tax over 5 years would require a 9% increase to the basic rate, or all income tax rates to rise by over 6%. <\/p>\n\n\n\n The report also notes that taxpayers would need to be confident that it would indeed be one-off. Given the suggestion of a five-year period for paying the tax it is difficult not to be concerned that the funds raised would start to be relied on, such that a further \u2018one-off\u2019 tax would follow a number of years later. <\/p>\n\n\n\n What next?<\/strong> <\/p>\n\n\n\n Nobody knows what changes will be made or when they will be introduced, and there has been nothing to suggest that the current Government would consider a wealth tax, in fact the only statement so far has been to the contrary. Given such uncertainty, it is important individuals do not overreact to this report and actions remain driven by commercial factors. As mentioned above, recent reports by the OTS have recommended changes to CGT and IHT and these are more likely to be taken forward in the short term. <\/p>\n\n\n\n The report notes that in July 2020, the Chancellor stated \u201cNo, I do not believe that now is the time, or ever would be the time, for a wealth tax\u201d. It is likely to hold less weight than reports commissioned by the Chancellor, for example recent reports by the Office of Tax Simplification (OTS) on IHT and CGT simplification. It is, however, well timed, at a moment when the Government faces the problem of a large deficit and the fairest way to share the cost of the COVID-19 crisis, alongside manifesto commitments not to increase income tax, VAT, or National insurance. <\/p>\n\n\n\n What is a wealth tax?<\/strong> <\/p>\n\n\n\n A \u2018wealth tax\u2019 is broadly a charge on a person\u2019s assets, in contrast to the majority of taxes that are charged when cash or assets move between parties. <\/p>\n\n\n\n The report considers two main options: an annual tax, and a one-off tax. The advantages of a one-off tax include that it would not distort taxpayer behaviour, as once implemented, future gifts or changes in residence would not affect the taxpayer\u2019s liability, wealth only needs to be valued once, and administrative costs would be proportionately lower. In the view of the authors, an annual tax would be much more difficult to deliver effectively and would only be justified if the aim was specifically to reduce inequality by redistributing wealth. <\/p>\n\n\n\n The report concludes that if the Government chooses to raise taxes as a response to the crisis, it should implement a one-off wealth tax in preference to increasing taxes on work or spending. An annual wealth tax was not recommended, but the report does strongly suggest that existing taxes on wealth, such as IHT, income tax on investments and CGT, should also be significantly reformed. <\/p>\n\n\n\n A one-off wealth tax<\/strong> <\/p>\n\n\n\n The more detailed proposal for a one-off wealth tax is that it is charged on an individual\u2019s net assets, being total assets minus debts, and on an individual rather than household basis, although couples could be jointly assessed. The report does not recommend exemptions, to avoid unfairness such as between those owning a mortgaged home, and those with the equivalent in cash saving for a home. Main residences and pensions would therefore be included, with the only exclusion being for low value items such as personal possessions \u2013 a threshold of \u00a33,000 per item was suggested. <\/p>\n\n\n\n It would be levied on assets at their open market value, creating a considerable issue of valuations. The report goes on to consider how various assets could be valued. <\/p>\n\n\n\n In principle, it would apply to the worldwide wealth of UK residents, regardless of an individual\u2019s domicile position, and to UK real estate owned directly or indirectly by non-residents. To reduce the arbitrary nature of applying a tax to those in the UK only for one year, a \u2018backwards tail\u2019 would be applied. The example given was that only those resident in the UK for four out of the seven previous tax years would be chargeable, even if they had since moved overseas, and those newly resident in the UK, for fewer than three years, would pay a reduced rate. This could tail to nil for those who first arrived in the year of assessment. <\/p>\n\n\n\n The report also recommends that gifts from parents to minor children should be assessed as part of the parents\u2019 wealth, and that the value of trusts settled by UK residents, using the wealth tax definition of residence, should be taxed, though that portion of tax could be paid from the trust funds. Various more specific recommendations were made in relation to trusts, including those not settled by a UK resident. <\/p>\n\n\n\n The authors of the report have refrained from recommending thresholds and rates, as they believe this is a matter for the Treasury, but, as set out below, have calculated the potential tax that could be raised using different rates and thresholds. <\/p>\n\n\n\n Paying the tax<\/strong> <\/p>\n\n\n\n The authors recognise that payment will be difficult for those with illiquid assets. They have three solutions: that it is payable over five years, that the portion relating to a pension should be paid from the lump sum on retirement, and that there should be a system to allow taxpayers to apply for further deferrals. <\/p>\n\n\n\n Introducing a wealth tax<\/strong> <\/p>\n\n\n\n How if at all to introduce a wealth tax remains a question for the Government, but the report recommends that any one-off wealth tax should be announced without prior warning to prevent any planning to reduce exposure to the tax. This would however also prevent public consultation and it is difficult to envisage that such a major imposition of new tax would be introduced without the consent of the electorate through a general election. <\/p>\n\n\n\n A one-off wealth tax does not come without challenges including valuation difficulties. It is insensitive to subsequent changes in wealth, and impacts disproportionately the old more than the young for the same level of wealth. Finding the money to pay the tax may require selling assets or extracting money from a business, which could in themselves create additional tax liabilities. <\/p>\n\n\n\n It would however raise a large amount of tax in a short amount of time. The report models detailed projections of how much tax might be raised, noting that a 5% charge on every individual\u2019s wealth above \u00a3500,000 would raise \u00a3260 billion. A threshold of \u00a32 million would yield \u00a380 billion. In contrast, they noted that raising \u00a3250 billion from income tax over 5 years would require a 9% increase to the basic rate, or all income tax rates to rise by over 6%. <\/p>\n\n\n\n The report also notes that taxpayers would need to be confident that it would indeed be one-off. Given the suggestion of a five-year period for paying the tax it is difficult not to be concerned that the funds raised would start to be relied on, such that a further \u2018one-off\u2019 tax would follow a number of years later. <\/p>\n\n\n\n What next?<\/strong> <\/p>\n\n\n\n Nobody knows what changes will be made or when they will be introduced, and there has been nothing to suggest that the current Government would consider a wealth tax, in fact the only statement so far has been to the contrary. Given such uncertainty, it is important individuals do not overreact to this report and actions remain driven by commercial factors. As mentioned above, recent reports by the OTS have recommended changes to CGT and IHT and these are more likely to be taken forward in the short term. <\/p>\n\n\n\n SRC-Time are one of the South East\u2019s leading accountancy firms in advising on all aspects of business, taxation and corporate finance and we can assist in any issue raised above. <\/p>\n\n\n\n