A “fair and efficient” tax

Figures from the Institute of Government show that in 2020 the reduction in GDP as a result of the coronavirus pandemic was the biggest decrease in any year since 1709 (apparently the year of the “great frost”). The cost of the pandemic measured by the annual fall in GDP has therefore exceeded any year during the two world wars, with only the 1920/21 Depression coming anywhere close to the same reduction. The cost of the pandemic to date for the UK is approximately £300 billion funded by government spending and borrowing. One thing is evident: the government will require higher tax receipts; but in which areas are tax increases likely to be made, and how will the current proposals affect your clients?

The Wealth Tax Commission

One method of part funding the cost which has been under consideration in recent months has been a relatively novel concept for the UK: a wealth tax. The Wealth Tax Commission (WTC) was set up in Spring 2020, independent of government with its members including academics and lawyers including the tax barrister, Emma Chamberlain. Its purpose is to provide in depth analysis of proposals for a UK wealth tax.

In a report issued on 9 December 2020 the WTC recommend a one-off wealth tax which they believe would raise revenue in a ‘fair and efficient’ way. They point out that one off taxes have precedents with past levies on banks and the newly privatised utilities. The Commission takes the view that a one-off tax would minimise administrative costs, reduce form filling and valuation requirements for taxpayers, and would not act as a disincentive to saving. The WTC also believe that the design of the tax would make it difficult to avoid and that it could raise a substantial amount of money. For example, the report states that a flat rate tax of 5% with a £500,000 threshold could raise £147 billion.

The tax, as envisaged by the WTC, would apply to the whole of an individual’s assets including their home and pension, net of liabilities, and would be payable by instalments over five years; those individuals with low liquidity could defer further than this period. Personal possessions would be included except for single items worth £3000 or less. The wealth tax would only apply to wealth above the threshold, although the WTC do not make any recommendations as to the rate or threshold as they feel that this is a matter for politicians. The WTC favour the introduction of a wealth tax over an increase in existing taxes.

Is this likely to come into force?

Dennis Healey in the 1970s tried to devise a wealth tax but was forced to abandon it as the task proved too difficult. The WTC acknowledge that the capacity of HMRC might hamper the implementation of a whole new tax. The work involved should not be underestimated. Anyone dealing with a deceased person’s estate which includes, for example, private company shares knows that valuation negotiations with the Shares Valuation Division can take many months – and this is without every private company shareholding in the country being valued at the same time.

Although the WTC believe that there is popular support for a wealth tax, a threshold of say £500,000 would bring many individuals within the ambit of the tax who may well have considered it would only apply to much wealthier people. The tax would inevitably be payable by a greater number of older people who have had time to accumulate capital. This could be seen as redressing the balance between the generations given the difficulty younger people have in buying property and acquiring capital assets likely to increase in value. However, the inclusion of pensions would probably be controversial given that the current limits on pension saving mean that the moderately wealthy would be affected. From a political standpoint, it is perhaps difficult to envisage the present government adopting a new tax that would hit many of their natural constituency (and indeed the present Chancellor has said that a wealth tax is not on his agenda).

The way forward

It may be some time (possibly only after a change of government) before we know whether a wealth tax will in fact be implemented. It should be remembered that the Office of Tax Simplification has produced several reports in recent years on the simplification of capital taxes such as inheritance tax and capital gains tax. A review of trust taxation has also been carried out, which has yet to result in any changes. Perhaps some thought should be given to implementing the best of those recommendations before putting a whole new tax onto the statute books.