How to pay for a pandemic? What about a Wealth Tax?
In April 2020, prompted by the exceptional circumstances of the COVID-19 crisis, a Wealth Commission comprised of two academics and a barrister was established. Its objective was to assess whether a wealth tax would be desirable and deliverable in the UK, and their aim was “to provide policymakers with a solid evidence base” and “to deliver the first in-depth analysis of a wealth tax in the UK for almost half a century”.
The Wealth Tax Commission worked with international experts including tax practitioners, economists and lawyers in order to study all aspects of a wealth tax including “issues of both principle and practice”, and acknowledged funding from the Economic and Social Research Council through the CAGE at Warwick and a COVID-19 Rapid Response Grant, and also a grant from Atlantic Fellows for Social and Economic Equity’s COVID-19 Rapid Response Fund.
Some key recommendations were:
- Should the government choose to raise taxes following the COVID-19 pandemic, a one-off wealth tax would raise significant revenue in a fair and efficient way. It would be very difficult to avoid and in practice would work without excessive administrative cost.
- An annual wealth tax would be more difficult to deliver effectively than a one-off wealth tax. Instead the recommendation was for “major structural reform” of existing taxes on wealth.
- The one-off wealth tax would be assessed on the open market value of the individual assets on a given date (including main residence and pensions) net of any debts; would be payable on wealth above a certain threshold; and the tax payable in instalments over five years.
- A date for determining the value for an individual’s wealth would be fixed on or shortly before the announcement of the wealth tax.
- Assets held in trust would be taxed by reference to the residence of the settlor of the trust (liability attributable to the trust fund would primarily fall upon the trustees and only secondarily on the settlor). If the settlor is not resident for wealth tax purposes on the assessment date, then the trust would only be liable if a beneficiary was resident, or to the extent that the trust holds UK-sited assets that are chargeable on non-residents.
- There would be an option for couples to be assessed jointly, with a combined allowance.
Who would pay the wealth tax?
Anyone resident in the UK for more than four out of the previous seven years, including anyone claiming the status of a “non-dom”. There would be a reduced rate for more recent arrivals.
Non-residents would pay the wealth tax on any houses and land owned in the UK whether they own it directly or through trusts or companies.
They did not recommend extending the tax to other assets owned by non-residents except perhaps foreign controlling shareholdings of UK private companies.
What threshold and rates are recommended?
The Wealth Tax Commission does not make any recommendations on setting thresholds or rates for the wealth tax, taking the view that this is a decision for politicians. Their report does, however, contain illustrations of potential thresholds and rates, including that of a 5% rate (taxed as an annualised rate of 1% over 5 years) applied to a series of personal wealth thresholds ranging from £250,000 to £10 million.
In a separate report, the Wealth Tax Commission gives detailed modelling of how much could be raised by a wealth tax, and from whom, at different rates and thresholds.
For example, a one-off wealth tax on all individual net wealth above £500,000 and charged at 1% a year for 5 years would raise £260 billion. By contrast, at a threshold of £2 million it would raise £80 billion.
As part of these illustrations, the Wealth Tax Commission clarifies that a wealth tax levied at 1% above £500,000 would require a couple to have net wealth exceeding £1 million before any wealth tax would be payable.
Would there be any exceptions to paying the wealth tax?
The Wealth Commission has suggested that if, after an assessment date for the wealth tax has been fixed, someone suffers a drastic fall in their wealth for reasons outside of their control, that it would be possible to provide some relief against the tax due.
If an individual genuinely could not pay the tax out of income and savings over the standard payment period of five years, then a “statutory deferral scheme” would apply so the tax could be deferred until there were sufficient liquid funds available.
The Wealth Commission has also suggested tentatively an indefinite deferral where a person’s wealth tax bill was more than 10% of the combined total of net income (after all other taxes) and their liquid assets.
Would the wealth tax really be a one-off?
The Wealth Commission has suggested that politicians could reassure the public of no repetition by calling it the “Covid Recovery Tax” or something similar.
Also, there have been one-off taxes levied before in the UK and the Wealth Tax Commission cited the one-off tax on banks in 1981 and the one-off tax on recently privatised utilities in 1997.
Is it going to happen?
The Wealth Tax Commission’s recommendations have not been endorsed by HMRC nor by HM Treasury (Rishi Sunak stated in July 2020 “I do not believe that now is the time, or ever would be the time, for a wealth tax”). In addition, as an Institute for Government paper on the subject has concluded, it could take some years for the government to consider the options, build public support and legislate effectively. It may be a risk to circumvent this process if the government has no mandate for this reform and if the wealth tax affects a relatively large proportion of the population.
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