In July, the Chancellor, Rishi Sunak commented: “No, I do not believe that now is the time, or ever would be the time, for a wealth tax”. Since then, the economic impact and cost of the Coronavirus pandemic (expected to be £335 billion) has become more of a stark reality.
The wealth tax proposal is simple: a person would need to value their worldly assets, including their main home and pension savings, deduct any liabilities such as a mortgage and apply a flat rate tax of 1% above £500,000.
When wealth taxes have been discussed in the past, it was expected that certain assets such as the main home and pensions would be excluded, but the Wealth Tax Commission argues that the tax should be all-encompassing.
The Commission’s report offers estimates of the potential tax revenues if a different wealth threshold was selected, ranging from £250,000 to £10 million. At the highest £10 million threshold, it estimates that 22,000 individuals would be subject to the wealth tax, generating £43 billion for the Government.
Whilst the content of the report makes for slightly uncomfortable reading, it makes a very compelling argument to the Government to raise significant tax revenue through a one-off mechanism, rather than adjust income tax, VAT or Corporation Tax. The report notes that all income tax rates would need to increase by 6% for a five period to raise the equivalent tax revenue.
There is a serious question around how someone pays a wealth tax if they do not have the immediate cash liquidity e.g. they are ‘asset rich but cash poor’. The Wealth Tax Commission notes that 570,000 people may be liquidity constrained at the £500,000 wealth threshold, and an instalment payment mechanism would need to be introduced ‘to reduce unnecessary hardship’.
It is worrying that a new form of tax could force people into hardship and a serious re-think would be needed here in my view. Pensioners who fund their living costs through savings, farmers owning agricultural land and private business owners will all be concerned by the proposals and how they will feasibly fund the tax. Such groups may need to take bank borrowing to pay the tax, although this may not be an option or cost effective for everyone.
