It was in July last year that chancellor Rishi Sunak said: "I do not believe that now is the time, or ever would be the time, for a wealth tax."
He has recently reiterated this stance, reportedly saying a wealth tax would be "un-Conservative".
But the Wealth Tax Commission (WTC) has other ideas. Last month the group of academics and tax professionals published its report examining the case for introducing a wealth tax in the UK.
So why now?
The projected budget deficit as a result of Covid-19 is 19 per cent of GDP - twice the deficit during the 2008 financial crisis.
The pandemic is set to dent economic activity for years to come, reducing future tax receipts and requiring further government spending.
Some of the deficit can be funded through borrowing, though borrowing and interest will clearly have to be repaid eventually.
The government made a manifesto promise not to increase income tax, national insurance contributions or VAT.
It's against this backdrop that the WTC has investigated the possibility of introducing a wealth tax.
What is a wealth tax?
Essentially, it's a broad-based tax on the ownership of net wealth. It implies the inclusion of all assets but with debts such as mortgages and loans deducted.
A research survey sponsored by the WTC and carried out last year noted there was a clear desire for increased taxes on wealth.
The key findings were:
- High levels of public support for a net wealth tax compared with other taxes;
- Support for the inclusion of financial investments and property wealth (after excluding the main home) as the base for the tax;
- Less support for including cash savings, pension wealth and the main home;
- Some preference for the tax to be based on net rather than gross wealth;
- That the tax should be individuals rather than couples or households; and that
- Most of the public supported a threshold of £500,000 for a wealth tax at a rate of at least 1 per cent.
The total net wealth held by individuals in the UK is estimated to be over £15trn. The amount of private wealth means even if modest tax rates are applied, very large amounts of revenue would be generated.
Based on a one-off wealth tax of 5 per cent payable on all individual wealth above £500,000 at 1 per cent a year for five years, the WTC estimates this would raise £260bn.
This figure takes into account administration costs and allows for some non-compliance.
A wealth threshold of £2m is projected to raise £80bn.
Such a tax would apply to individuals whose total net wealth, after splitting the value of shared assets such as a jointly owned family home, exceeded the threshold.
The WTC identified alternative tax rises which could also raise £250bn over five years, including:
- Raising the basic rate of income tax by 9p
- Raising all income tax rates by more than 6p
- Raising all VAT rates by 6p
- Increasing corporation tax by 5p and VAT by 4p
The commission identified that a wealth tax should raise significant revenue, and do so efficiently without creating excessive distortions to behaviour.
It also said a wealth tax should be fair, difficult to avoid and achieve all this better than the alternatives.
The report suggests all assets be included, subject to a de minimis limit of £3,000.
The authors argue it would be unfair if two people with equal wealth but with a different asset profile had different wealth tax bills (what they describe as "horizontal unfairness").
If classes of asset were exempt, then it's likely the wealthy would look to own such assets, leading to what the report calls "vertical unfairness".
In general, having exemptions can lead to avoidance where taxable assets are sold and the proceeds reinvested in the exempt assets.
While pension rights are often exempt in other countries with wealth taxes, the WTC points out that 40 per cent of UK private wealth is held in pensions.
So excluding pensions would significantly reduce the yield from the tax.
Ireland had a pension fund levy in place between 2011 and 2016 for 6 years to help meet the costs of the financial crisis. The levy started at 0.6 per cent before increasing to 0.75 per cent.
Other countries with a wealth tax such as Switzerland exclude the value of the family home.
However, this was thought inappropriate for the UK as Switzerland has an annual wealth tax, whereas the WTC envisages a one-off levy.
In terms of who would be liable, the UK wealth tax would be imposed on individuals, with an option for couples to be taxed as a single unit.
Gifts from a parent to minor children would be aggregated with the parent’s wealth.
Those resident in the UK would be subject to the tax with reductions for recent arrivals and departures. Non-UK residents would be taxed on the total value of UK assets.
The WTC suggests wealth would be assessed or measured as close as possible to any wealth tax being announced, in order to prevent forestalling.
Assets would be valued on an ‘open market value’ basis, a familiar concept in the UK tax code. Pension rights would be valued at their cash equivalent transfer value.
The WTC admits there would be difficulties in valuing businesses but believes these could be overcome. This is one reason why it suggests a one-off tax paid over five years, to allow time to complete and agree valuations.
Another issue would be the need for liquidity - would the taxpayer need to sell assets to pay the wealth tax?
The WTC looks to get around this by having the tax paid in five annual instalments. Liabilities in respect of pension assets could be deferred until crystallisation, or until the taxpayer reached state pension age.
How likely is a wealth tax really?
Wealth is currently taxed in a number of ways:
- Transfers of wealth (inheritance tax)
- returns on wealth (income tax and capital gains tax)
- spending wealth (VAT)
- ownership of specific forms of wealth (annual tax on enveloped dwellings)
- council tax (a tax that is often overlooked)
Given the recent Office of Tax Simplification reviews of both inheritance tax and capital gains tax, could increases here make the case for a wealth tax less compelling?
The UK has never had a wealth tax, though it has had one-off taxes in the past.
Margaret Thatcher's government levied a 2.5 per cent tax on bank’s non-interest bearing current account deposits, while Tony Blair’s government levied a tax on the ‘excess profits of the privatised utilities’.
Both were widely criticised, but both were still implemented and raised significant amounts of revenue.
Few believe that a Conservative government would introduce a wealth tax, and it's only recently that the chancellor is said to have reiterated his opposition to introducing one.
But in the post Covid-19 world, nothing can be taken for granted.
Argentina recently announced a one-off wealth tax to help meet the cost of dealing with the pandemic, and Spain has also announced an increase to its annual wealth tax.
So will the UK follow suit?
If Mr Sunak continues his opposition to a wealth tax, what are the alternatives to meet the Covid funding gap without breaching manifesto promises?
Ultimately, does all this mean substantial increases in capital gains tax and inheritance tax could yet be on the cards?