The Wealth Tax Commission have now published their final report which considers whether a UK Wealth Tax should be introduced, and if so, how this could be applied. Although the Chancellor was quoted in July 2020 as dismissing the introduction of a Wealth Tax, the deficit as a result of the COVID-19 pandemic has continued to increase and six months on the country is back in a state of lockdown with much of the economy closed for business. The Commission have estimated that a one off Wealth Tax could raise one-quarter of a trillion pounds.
Could this number tempt the Chancellor to reconsider his earlier comments?
The Commission have suggested that a one-off Wealth Tax could be applied to those individuals with wealth exceeding £500,000, charged at 1% per year for five years. The value of an individual’s wealth encompasses all assets less debt and would only include a share of jointly owned assets. For example, a couple would need to have net wealth of more than £1million to come within the charge.
Could other taxes be increased?
Consideration has been given to other taxes that could be increased to give the same take for the Treasury including Income Taxes, VAT and Corporation Tax. For example the rate of Income Tax would need to rise by more than 6p. However, tax increases tends to distort behaviour with taxpayers arranging their affairs as far as possible to reduce the impact of the tax rise which in turn affects the overall taxes raised as a result of the increase. The Commission recognise that the introduction of a Wealth Tax could create a similar issue and therefore recommend that it is introduced without prior warning or retroactively.
What challenges will a Wealth Tax pose?
The valuation of certain assets can be difficult, for example shares in private companies, and what about those individuals who are ‘asset rich, cash poor’. Do they need to sell their assets to fund the tax or could the tax be paid in instalments to avoid this scenario? Where a large amount of wealth is held in pension funds some form of deferral mechanism would be required since individuals cannot access their pension fund until later in life under current legislation.
The introduction of a Wealth Tax is certainly not straightforward and unlikely to be popular either. We do not expect its introduction to be imminent and the Government is more likely to consider changes to existing taxes such as Capital Gains Tax and Inheritance Tax (discussed in our previous blog here) in the short term with the first announcement on tax changes expected in the budget scheduled for 3rd March.
If you would like to discuss this further, please contact Jill Walker, Private Client Tax Director, or your usual AAB contact.
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