With a forecasted figure of £394bn ($538bn) in 2020/2021, there is ongoing speculation surrounding the UK governments response to the ballooning public deficit. Having promised a triple tax freeze across income, national insurance, and VAT in its manifesto, alongside ruling out further austerity measures, Hannah Wright explores another potential option
In December 2020, the UK Wealth Tax Commission released a report on the potential for a one-off wealth tax, aimed at raising additional revenue in response to the extraordinary costs of Covid-19. Based on the value of assets owned by an individual, minus any debts, the tax would seek contribution from those who are best able to pay based on their wealth.
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The case laid out by the report provides an extremely compelling argument for a one-off tax, of which the finer details – such as the threshold and rates – would be determined by the government.
The report’s FAQ document alone spans 21 pages and seems to leave no stone unturned.
Thanks to the report, the government now has “the exact structure they would need”, says Arun Advani – one author behind the publication.
The document, which explores a series of tax thresholds and rates, unites expert opinion across the tax domain. In essence, it offers a solution to how the government might meet the significant financial challenge of Covid-19. In reality, the government appears disinterested.
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By GlobalDataIndeed, chancellor Rishi Sunak stated recently that he would not engage with a one-off wealth levy, rendering the idea as distinctly “un-conservative” and unaligned with party ideology. This, whilst perhaps true, seems a strange argument to adopt following months of “un-conservative” (albeit crucial) state-assisted initiatives.
Explaining the motivation behind the report to PBI, Advani says: “We attended a treasury select committee on how to raise tax after coronavirus. Every person that was called to give evidence mentioned three options: income tax, national insurance contribution (NIC) or VAT. That simply isn’t true. You don’t have to be progressive about the taxation you choose, but you cannot deny that the option exists.”
A fourth option
After garnering much media attention, the option is now stuck in certain people’s minds. The report specifies a design for a one-off tax that would supposedly raise significant revenue in a fair and efficient way, be very difficult to avoid, and would work in practice without excessive administrative cost.
Advani adds: “Nothing in tax is easy, but the liability is fixed with a one-off levy, so it’s hard to find ways to avoid it.”
Despite the criticisms of an annual wealth tax, a one-off tax sits differently.
Speaking to PBI, Emma Chamberlain, a barrister at Pump Court Tax Chambers and co-author of the report, explains: “We – the commission – all came to the task with an open mind. I started the project feeling slightly more against an annual tax than for it, but I was certainly prepared to be convinced. Having completed the research, we are all certain that an annual wealth tax is not a practical option in the UK and our report does not recommend that.”
Instead, the recommendations outlined in the report state that, should the government choose to raise taxes following Covid-19, it could implement a one-off wealth tax in preference to increasing taxes on work or spending.
The report argues that a one-off wealth tax would be better for the economy than rises in income tax, national insurance contributions or VAT because a one-off wealth tax would not discourage work or spending.
Chamberlain continues: “If the government decided they want to raise a lot of money quickly, then I’m certainly convinced that using a one-off levy would be appropriate.”
“Increasing income tax across all bands could be an alternative, but income tax at higher rates doesn’t raise much money because people can decide not to earn the money or choose other methods of deferring taking income. Then there are tax rates at lower levels of income which perhaps isn’t very fair.”
However, the prospect of a one-off wealth tax has raised criticism from several corners of society.
Rachael Griffin, a tax and financial planning expert at Quilter, believes the tax burden would unfairly fall on one particular generation – over 50s: “Whether it is in their pension pot or house, this one-off wealth tax feel indiscriminate. Many people started saving for their pension’s decades ago. I think it pulls the rug from beneath people, particularly those that have been making plans throughout their lifetime. It is often individuals that have saved up. They are prudent and they work hard.”
Misplaced financial pressure
Yet, under the rationale of fairness, it could be argued that a one-off levy is an appropriate way of redistributing the wealth lost from lower income households.
According to official statistics, since the beginning of the pandemic, total household savings have increased and total household debt remains mostly unchanged, largely due to a fall in spending on nonessential items.
However, evidence suggest that some households, particularly those with low incomes, have run down their savings and increased debt since the start of the pandemic. The Commons Library Briefing cites that, whilst every group saw an increase, the lowest income fifth of users saw a £170 per month decline in their savings.
Laith Khalaf, a financial analyst at AJ Bell, agrees: “It’s clear that the young, the self-employed, and those on lower incomes have borne the brunt of the financial damage inflicted by the pandemic. But more affluent households with steady, undisturbed income streams have found themselves awash with cash, as spending options have been severely curtailed by ongoing lockdowns.
“It’s particularly telling that those on higher incomes who were furloughed were much more likely to be paid in full than those at the bottom end of the spectrum. Again, this paints of a picture of financial pressure falling on those least able to afford it. At the end of the pandemic we will be left with a wider divide between the have and have-nots. The government will likely seek to address exacerbated inequalities, which probably spells higher taxes for wealthier households. The March budget is approaching, but the Chancellor will likely be in spend and support mode until later in the year. At some point the bill for the pandemic will need to be presented to the taxpayer and those with more change in their pocket will probably be asked to contribute more.”
Similarly, as evidenced through data from YouGov and The Resolution Foundation, the most important driver of increasing British wealth has been rising asset valuation, and coinciding with this, falling interest rates. Active saving has played a very small role in shaping the scale and distribution of household wealth. This is true for all three major forms of wealth – financial, property and pension. Evidently, when opposing a one-off wealth tax, the assertion of fairness does not have legs.
“Special pleading or a fundamental misunderstanding”
Speaking to PBI, Roger Clark, group head of wealth planning at Brown Shipley, believes the report also fails to consider a valuation issue: “Whilst it is easy to value a quoted investment, and it is relatively easy to value property, it is more difficult to value private company shares or private businesses. For wealthier clients, private collections will be difficult to value and, in some cases, families are going to have to pay for those valuations themselves. The valuation, whilst achievable, is not straight forward and could involve additional cost.”
Secondly, Clark argues: “For someone who has their own firm, and that is their main asset aside from their residence, how would they get the money to pay for the tax? At some stage, they’ll have to take the money out of their company, perhaps by way of dividends. That will cost them tax to get out, which they then must use to pay more tax. They pay tax to get the money out to pay more tax.”
Chamberlain deems this argument as “either special pleading or a fundamental misunderstanding”.
According to Chamberlain, valuations are regularly done for private company shareholdings on death – and indeed on gifts, shareholder disputes or when providing income tax valuations for share incentivisation schemes to employees.
She adds: “I have never heard someone claim they can’t make a gift because they could not value their company. I see frequent valuations in practice e.g. on death for IHT purposes. They are not generally problematic unless there is an ongoing dispute between shareholders. We acknowledge in the report that private company share valuations are the hardest area, but they are certainly done already. Switzerland does it every year.”
Concerning Clark’s second argument, Chamberlain reinforces that the one-off tax could be paid out of other resources, such as cash, quoted investments or earnings. “You don’t have to pay this tax out of your business. A beer tax doesn’t have to be paid out of beer. For difficult cases, where tax might be deferred indefinitely, we have a liquidity test. Someone who must pay tax on their house has to pay it out of income – which is taxed – or out of savings such as financial assets – which may need to be sold. Why should companies be any different?”
All’s fair in tax and war
Despite misleading headlines, the study shies away from recommending one particular threshold.
“Personally,” Chamberlain says: “I wouldn’t deem it worthwhile introducing anything much below £2m per individual – roughly £4m a household. Then you’re only affecting about 600,000 individuals which has many advantages.”
Griffin concurs: “In my opinion £1m is too low. If you’re including all assets, it doesn’t take a lot to reach that figure in housing alone, particularly in the south of England. £2m or higher.”
Concerning the reaction from her UHNW clients, Chamberlain says that she has received ample positive support: “Many of my wealthier clients wrote to me and agreed the one-off tax was the way to go – keeping it simple, one-off, devoid of complication. There is an acknowledgement that they’ve got broad shoulders, so they could pay. Interestingly, it is often the practitioner groups – the solicitors and accountants that advise high net-worth clients, that are more critical.”
Clark is of the same opinion: “Covid-19 has altered perceptions, and wealthier clients have started to look at how they use their money. I believe that if the tax is fair and it is being used in the right way – to pay for pandemic related debt – it will likely garner considerable support.”
Jeremy Franks, head of wealth planning and advisory, EMEA, HSBC Private Banking echoed this positive sentiment: “Our clients at HSBC Private Banking understand the responsibility that comes with significant wealth, and they want to make sure they are contributing to a wider society. A wealth tax is of interest to many people across the wealth spectrum.”
“However,” Franks continues: “There are some natural concerns that a one-off wealth tax, spread across five years, could be extended by a future administration. In five years, a new government might decide to implement another one-off tax payable over another five years. It would be easy for this to metamorphosise into an annual tax when the original intention was just a one-off.”
The report dismisses this concern: “The public understands that Covid-19 is a once in- a-generation crisis, that may require an exceptional response. International examples of one-off wealth taxes levied in the past have invariable followed major crises like the World Wars. Politicians could help to reassure the public that the tax will not be repeated by explicitly calling it the Covid Recovery Tax, or similar.”
In search of an alternative
Considering such resistance, it seems sensible to look at the alternative. There is a strong line of thought that, with negative interest rates, perhaps the debt doesn’t need to be paid off at all, whilst the report itself also argues for the reform of existing taxes.
Franks disagrees: “This report helps to focus people’s attention on the need to address a deficit that is increasingly significant.”
The deficit, which the IFS predicts will reach £350bn in 2020-2021, “clearly needs to be financed” says Franks.
“Even after the vaccine has been rolled out there will be some economic scarring. Tax revenues will continue to be adversely impacted and there is likely to be a need for support, particularly amongst those areas that have been hit the hardest. The borrowing will be augmented by the requirement for additional borrowing in 2021 and beyond, so there is a reasonable probability taxes will need to rise. If so, where?”
In line with the commission’s critique of the asymmetry between capital gains tax and income tax, Franks adds: “I think a far greater candidate would be an increase in the capital gains tax rates, given that there is a significant disparity between 25% or 28% CGT rates whilst top rate of income tax is 45%.”
Clark adopts the same stance: “I’d be inclined to think that what they might do first is look at the revenue they generate from existing taxes, before introducing a new tax. That seems to me to be the sensible proposal. The government currently have proposals for reform of inheritance tax and capital gains tax, whilst also considering attaching VAT to sharing platforms like Uber and Airbnb. Of course, the government must act with caution because it agreed not to raise income tax or VAT in its manifesto.”
Franks concludes: “Clearly the tax system is being looked at, and a one-off wealth tax is very much part of the conversation. It is a thorny and complex issue, being debated all over the world as governments establish how they will pay for the enormous cost of Covid-19. ”<
