Would a One-off Wealth Tax Fix the UK’s Coronavirus Financial Hole?

What’s the story?

On 9 December 2020, a group of academics and tax professionals known as the ‘Wealth Tax Commission’, published a final report that concluded the UK could benefit from introducing a one-off wealth tax. Historically, parliament has not pondered a wealth tax since the days of Harold Wilson’s administration in the mid-1970s. This came against the backdrop of high inflation, rising unemployment and large-scale strikes. However, the state of public finances following the Covid-19 pandemic has prompted a fresh discussion on the prospect of tapping wealth to cover the pandemic’s cost.
 
So, what exactly is the WTC proposing? The WTC proposes that the tax should cover all assets, including private homes and pensions and apply to UK residents and those who have recently been resident. It suggests the tax should have a broad base with a proposal that it might apply to wealth above £500,000 per person, or £1m per couple.
 
The WTC propose that any asset valuation date should be set at a date prior to any announcement, to reduce scope for avoidance. Payment of the tax might be spread over a number of years to ease liquidity issues. The WTC has not set a tax rate or tax thresholds – this is a decision for parliament. However, the report includes illustrative figures for a one-off rate in the region of zero to 15 percent. By way of illustration, the WTC suggest that a five percent (one percent per annum over five years) one-off rate applied along the lines proposed, has the potential to raise £260bn.
 
From a purely fiscal perspective, the size of the UK Covid debt is not the problem. Currently, interest rates are low and, despite the large spike in borrowing, the UK’s debt-to-GDP ratio is quite low by international standards and, assuming interest rates stay low, looks manageable. The real problem is the ongoing deficit that could result from higher spending and lower tax revenues in a weakened economy.
 
There is also concern that with a threshold as low as £500,000, many people who do not consider themselves especially wealthy will be subject to what is referred to as the “inheritance tax effect”, whereby the tax is perceived as threatening and unfair by people who are not affected by it. Regarding the £500,000 threshold, the average house price in Greater London is £624,004, it would be inaccurate to describe the average London homeowner as wealthy and nonsensical to assume they had £31,200 in liquid assets to cover their tax bill under this proposal.
 
Potentially, a 5 percent tax payable over 5 years and 1 percent by annum may begin to resemble an annual tax. Although this may potentially raise £260bn, the WTC do not offset this gain against the cost of a potential exodus of wealthy UK residents and a decrease in future foreign investors. Such was the situation for France, who, between 2000 and 2014, saw 42,000 millionaires leave the country. The tax amounted to mere £2.6bn a year gain for the French government but saw more than £125bn in capital leave the country annually.
 
If Rishi Sunak’s comments are anything to go by, there will be no wealth tax nor will there ever be. However, with a £260bn financial hole, the Chancellor’s position could very well be influenced by public opinion and economic reality.
 
The full Wealth Tax Commission’s report can be accessed here
 
 
How will this affect law firms?
 
Based on the reception by government, the WTC’s report seems consigned to history. However, the hypothetical effects on law firms would be extremely broad. As such, I will briefly talk about one area: business assets.

Business assets are potentially very problematic to value. For instance, company shares or intellectual property could be taxed at a rate which is disproportionate to their value, this is an area not covered by the report.

Law firms have provided insight into this report for the benefit of their clients. For instance, Macfarlanes expertly highlighted the potential that business assets can be taxed at a much higher rate than 5%. Partners Piers Barclay, Gregory Price and Associate Thomas Schlee provided the following insight:

‘if tax is levied on shareholders on the open market value of business, the cost of that tax may well need to be extracted from the business before any tax can be paid. Since tax will generally be due on distributions from businesses, the effective rate on tax on business assets would in many cases be much higher than 5%.’