Here We Go Again: The Wealth Tax Debate

The pre-Budget merry-go-round has been spinning for a few months and has gathered pace over the last few weeks with the date of the Autumn Budget being announced. The Chancellor of the Exchequer will unveil her plans on 26 November and if history is anything to go by, credible leaks may let us know what is happening a week or so beforehand.

There has been renewed speculation around the possibility of a Wealth Tax being introduced. We don’t like to speculate on whether this will happen but consider how it could happen and how effective it could be at targeting the areas the Government may want it to.

The issue with any tax is the target for HM Treasury, and a general Wealth Tax is very broad, and we need to look at how the wealth in the UK is distributed, and what, realistically, would be the aim for such a tax.

How the UK’s Wealth is Owned

In the interests of transparency, the Office for National Statistics (ONS) produces a great deal of information about the country’s finances and this includes data on how households hold wealth in the UK. The most recent data available covers the period from April 2020 to March 2022, so not up to date, but does give us an idea of the breakdown of wealth and how it is held.

The breakdown provided by the ONS is as follows:

We have seen tax changes since this data was collated including the changes in the last Budget, such as increases to capital gains tax and changes to the taxation of UK resident non-domiciles, which has resulted in reports of a number of people leaving the UK rather than be subject to the new Foreign Income and Gains regime. This is not only UK resident non-domiciles, but also UK domiciles choosing to leave and remove themselves from inheritance tax. The change to a residency-based system provides them with certainty, removing the reliance on the opaque nature of domicile.

These changes over recent years would have an impact on these figures. Given rising property prices and investment markets providing some increases in values, coupled with this being the only reliable data available, means we can use these figures to provide some context.

Taxing the UK’s Wealth

The UK’s wealth is divided across four categories, and each will have its own nuances.

Two of these categories, Property Wealth and Physical Wealth, account for around 50% of the wealth. Not everyone who has wealth in either of these two categories will have the available cash or liquidity to be able to pay a tax on its value. A broad tax on property values would be difficult for many to pay and for those that may, on the face of it, appear to have sufficient liquidity could be penalised for retaining accessible wealth. It would be reasonable to expect the wealthiest individuals to already have money sheltered from any potential tax raid and for others it would not be a sensible approach to expect taxpayers to leverage assets to pay a tax, or even dispose of them to avoid it.

Looking at the remaining 50%, the majority of this is in pensions which is tax privileged and designed to provide people with long term financial security. Savings for retirement needs to remain attractive for individuals to help relieve the burden on the state, which is struggling to meet its continued commitment to the triple-lock and government sponsored final salary benefits.

Within the next two years we will see unspent pension funds being subject to inheritance tax and to apply a one-off tax on these funds would seem unlikely. It would also generate what could be considered as a retrospective tax, taxing assets that cannot be structured in any other way.

This leaves us with financial wealth, accounting for less than 15% of the country’s total personal wealth. It may be the easiest element to target however it is not the largest pot and would impact those who have decided to save for their future. This will include those using some of the Government’s incentives such as individual savings accounts and gilts. There would also be entrepreneurs who have struggled to create and maintain a business to help maintain a healthy economy. In my eyes this would be wrong demographic to target.

Let’s Wait Until The Budget

There are too many pitfalls to a general Wealth Tax and therefore I would expect there to be a much more targeted approach to any new tax, such as a mansion tax for example, but this again comes with pitfalls, such as the increased property values in certain parts of the UK.

There has already been a lot of speculation with reports of what the Treasury are looking at, and given the need to raise revenue, they are probably looking at everything to be fair. There will always be winners and losers, and some will see an unintentional increased tax burden.

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