Wealth Tax: a wardrobe monster?
The Wealth Tax Commission has just issued its report. Here are some initial reflections on its work and what it could mean.
The classic John Smith’s advert featuring Peter Kay reminded us that we shouldn’t worry about the wardrobe monsters – instead be worried about the burglars. We will return to this.
The Wealth Tax Commission has issued its report. A quite monumental piece of work in many ways with copious amounts of background research and papers. A wealth (geddit?) of material that could be utilised for some time when considering tax policies and ideas. Whatever happens, it is a serious contribution to the general tax ‘conversation’.
What has the Wealth Tax Commission proposed?
Well, to start, the Commission is not recommending anything, as such. It has analysed different methods of a wealth tax working (particularly one-off versus annual). It also aimed to provide food for thought for government on mechanisms as well as matters of principle on how a government might address the need to raise a significant or (per the Commission) “exceptional” amount of tax. The Commission did note possible changes to other taxes that might be required to raise the same “exceptional” amount of tax as a potential wealth tax. Overall the Commission tends towards a one-off wealth tax rather than an annual version. The Commission concludes that if an annual wealth tax was preferred by government that a better approach would be a wholesale restructuring across the board for tax.
The Commission concludes that a well-designed one-off wealth tax would (to raise £260bn in revenue) be at a rate of 5% over £500,000 per individual or (to raise £80bn) at a rate of 5% over £2 million per individual, payable at 1% per year over five years.
If an one-off wealth tax was adopted, it could be something branded as a ‘Covid Recovery Tax’. Its one-off nature would be underscored by the tax being assessed on the day of announcement. This is partly designed to minimise scope to avoid the tax.
The Commission has recognised, and considered acceptable, the practical and logistical issues of seeking to value all wealth (homes, land, pensions, businesses, investments, trusts…) at a single point in order to assess the tax.
As an aside, the Commission’s consideration of an all-encompassing approach to tax across all assets interests us. Tax sometimes drives the legal structures people adopt. But it is more important to consider the overall characteristics and benefits a structure gives. Often, it is the very fact it provides structure that matters.
The tax reform ‘recipe’: politics
The Commission is not recommending that a wealth tax is the way forward for tax and revenue-raising. Who knows if a wealth tax would happen. Other countries have tried it and some have then ditched it or watered it down. The movement away from a wealth tax coming either from unpopularity or the logistics of running the tax. It will, as the Commission says, be down to politicians to consider and then decide to bring in any form of wealth tax.
BUT, the Commission’s work puts tax in focus again. We have had the Office of Tax Simplification consider inheritance tax and more recently, and perhaps more sharply, capital gains tax. The covid situation means the government has been spending huge amounts and will need, at some point, to attempt to recoup some of that expenditure. There is (nervous) anticipation for Spring Budget 2021. So, as we blogged on before, what has historically mattered on capital tax is the simultaneous presence of key ingredients: a tax reform/revolution cake recipe. The Great British Tax Off, if you will. We have previously said that the recipe appears to be: (1) tax is too complicated; (2) tax is not ‘fair’; and (3) the macro-economic situation creating a political momentum for change. The latter factor being the determining factor underpinning change.
Wealth Tax as a wardrobe monster
Maybe there will be a wealth tax. We suspect there will not be. (If there is, we could just delete this blog and the prediction never happened!!) A wealth tax feels like a wardrobe monster. It is scary. It is in our mind. It gives us nightmares. It makes you peer with one eye from under the duvet. But it does not exist.
Meanwhile, the burglars are out there. The burglars here are other taxes that do exist and are sitting there ready (potentially with reforms and updates) to tax your wealth. Maybe there will be a wealth tax, but for now, planning to protect you, your family and business from the current tax regimes would seem to be the way to help you sleep better at night.
As Peter Kay ended the chat with daughter, Britney in the advert, “sweet dreams“.
For help and advice on succession planning and related issues get in touch with Alan Eccles