101: A wealth tax for the UK? The international angle
On Wednesday 9 December 2020, the self-appointed Wealth Tax Commission published its recommendations for a one-off wealth tax (or ‘Covid Recovery Tax’ as the commission suggested it might be called) in the UK. The proposals sparked much debate in the mainstream press about the merits and problems with such a tax for UK residents. There has been less focus on the international angle.
The authors were at pains to point out that it was not their intention to recommend a wealth tax to the government. Rather, the recommendation was that if the government decided it needed to raise taxes, then a one-off wealth tax would have much to offer. Given that the budget deficit is predicted to reach 19% of GDP, the highest it has ever been in peacetime, some sort of tax rises must be something of a foregone conclusion.
The proposal was to tax ‘wealth tax residents’, regardless of domicile, on their net assets of all types above a certain threshold. What rate and what threshold to apply would be for the government to decide. The authors focused on a 5% rate, paid over five years, on a threshold of £500,000 per individual (or £1 million for couples, who could elect to be assessed together). They predicted this would raise £260 billion over five years. To put this in context, the Institute for Fiscal Studies predicted in October that the deficit in 2020 / 2021 would be £350 billion, so the one-off wealth tax could potentially pay off nearly three quarters of this.
The proposed tax would be very difficult to avoid. This in fact was one of the arguments for having a one-off rather than an annual tax, which would enable individuals to implement strategies to minimise it, both reducing tax take and affecting the economy.
For a start, it would not be possible to escape the tax simply by ceasing to be UK resident shortly after the tax is announced, or even before it. The concept of ‘wealth tax resident’ would have a ‘backwards tail’ so that if an individual had been UK resident in (say) at least four out of the previous seven tax years preceding the year of assessment, they would be resident for the purposes of the wealth tax.
Similarly there was some protection for new arrivals – those who are resident in the year of assessment but have been resident for under three years previously might pay only a pro-rated charge, and those who had only just arrived might pay none.
It would not be possible, either, for a wealth tax resident individual to reduce their wealth tax bill by moving assets outside the UK, or by reinvesting in different asset classes. Assets of all types worldwide, net of debts, including main homes and pension pots would be within the scope of the tax, regardless of the individual’s domicile.
What about individuals who are not wealth tax resident?
In the case of non-wealth tax resident individuals, the proposal was not fully decided. These individuals would, the report proposes, be assessed to wealth tax in respect of UK real estate, whether commercial or residential, and whether directly held or held through a company. The commission considered there was no real argument against this; and that it was reasonable and straightforward to enforce. Debt would be deductible, provided it had been taken out to purchase the UK real estate.
For most other asset types held by non-UK residents, the commission considered that these should not be assessed to wealth tax, mainly because of the practical difficulties of identifying ownership and enforcing the tax. A possible exception to this was business interests in the UK owned by non-wealth tax residents. On the one hand, not including such business assets would give rise to inequality between UK residents and non-UK residents with UK businesses, setting the UK resident business owners at a disadvantage. However, assessing the non-wealth tax resident owners of such businesses to wealth tax could give a negative message about doing business in the UK. This point would evidently need to be decided one way or the other if the wealth tax were to be introduced.
Will trusts be assessed to the Covid Recovery Tax?
The short answer is yes, a trust would be assessed to the proposed tax if there were certain connections to the UK. The report contained a detailed consideration of how the tax on trusts would be assessed, and on whom the liability would fall.
In summary, if the settlor is alive and wealth tax resident, the trust should be liable to the one-off wealth tax on the entire trust fund. This would be regardless of where the settlor was resident when they established the trust, and where the trustees are resident.
If the settlor is not wealth tax resident in the year of assessment, the trustees would pay the one-off wealth tax only if a beneficiary was wealth tax resident, or the trustees held any UK sited assets which are chargeable on non-residents (such as residential property).
In respect of a wealth-tax resident beneficiary, in the case of a life tenant entitled to receive all the trust income, the entire trust fund would be subject to wealth tax. In the case of a discretionary beneficiary, the tax would be levied looking only at beneficiaries who could actually benefit now, not future contingent beneficiaries.
If the settlor or beneficiary (as the case may be) had been wealth tax resident for only a short time, the tax on the trust would be pro-rated in the same way as it would for individuals.
How likely is a one-off wealth tax?
If it is introduced in the manner envisaged in the Wealth Tax Commission’s report, the tax would cast a wide net both in the UK and among those with UK connections. But how likely is it to happen? Mr Sunak said in July:
‘I do not believe that now is the time, or ever would be the time, for a wealth tax’.
A quote with which the Wealth Tax Commission chose, interestingly, to begin their report. They evidently think he may change his mind now.
The Wealth Tax Commission is a self-appointed body, it was not established by the government, although the thoroughness of the research and the calibre of its authors, some of whom are involved in advising on other aspects of tax policy, will no doubt make the report worthy of Mr Sunak’s attention.
Would the public accept a one-off wealth tax? The report’s authors cite research into the apparent acceptability of a wealth tax, relative to raising other taxes. Of course many individuals who claim to support a tax called a ‘wealth tax’ wouldn’t think they would need to pay it themselves: they would assume they were not ‘wealthy’ enough. But if the threshold for the wealth tax is really £500,000, and this includes homes and pension pots, as has been suggested, 16% of the population would need to pay it, including many who do not consider themselves wealthy at all. The Wealth Tax Commission claimed that the research addressed this, though the arguments on this point were not particularly convincing.
Some of the individuals who would have to pay the wealth tax may not have a great deal of income, either, and may struggle to pay it. The commission recommended that individuals with ‘liquidity’ problems should be offered the chance to defer payment of the tax, though exactly how this would work in practice, and what hardship might still be caused, remains to be seen. The reality of a wealth tax might be rather less acceptable than the theory.
Even the report’s authors think a one-off wealth tax is not necessarily the best option. What they really feel we need is wide reform of our ‘broken’ tax system. Though they may have a point, fundamental reform of the UK’s tax system, which is one of the most complex in the world, would be a task of monumental proportions, and not something the government would be able to tackle while it has so much else on its plate. The report’s authors understand this, and argue that a one-off wealth tax would be rather more realistic to implement in the short-term.
What would be much simpler than the wealth tax, though, is simply to raise existing taxes. The Wealth Tax Commission report considered this, and noted that the basic rate of income tax would need to rise by 9% in order to raise £260 billion over five years. Alternatively, VAT could rise by 6% or all income tax rates by 6%.
However, these alarming tax rates are calculated based on the premise that the national debt must be tackled aggressively. This is not necessarily the case. Interest rates are historically low and predicted to remain so for some time to come. The cost of the government’s borrowing is much less than it would have been in previous times. Given that any tax rises can have a detrimental impact on the economy, Mr Sunak might opt for a more balanced approach, leaving funds in the economy in the hope that this will help it regenerate. Perhaps drastic solutions like the wealth tax may be discarded in favour of simpler, and perhaps even modest, tax rises.