The Wealth Tax Commission was established in spring 2020 to report on whether a wealth tax in the UK could work, and if so, how it should work.
Since last spring the Covid crisis has put a strain on the public finances which will be a challenge to the Chancellor if we are not to return to austerity to reduce the debt. It ultimately means taxes will have to rise, either by breaking
the manifesto commitment or thinking about a new tax, such as a one-off wealth tax, taxing the wealthy and those ‘with the broadest shoulders.’
A wealth tax is a tax on net wealth, i.e. a tax paid by individuals on their ownership of assets after deducting the value of mortgages and other debt. It could include main residences and pension pots.
Those in favour of a wealth tax cite that, if well-targeted, it could reduce inequality of wealth, as well as raise revenue. However, many other European countries who have used the tax have since abolished it due to the costs
We already have taxes which raise revenue on wealth, such as capital gains tax and inheritance tax. These taxes are charged on transactions and events, normally through which revenue is raised to pay the tax. In the case of a wealth tax it is a dry tax being levied without any underlying transaction. Therefore, for farms and estates, how would it funded?
The commission released their report on 9 December. They conclude that a one-off tax, rather than an annual tax, would prevent avoidance, and could be an acceptable response to the Covid crisis. They recommend the tax should be payable by individuals and trusts, with the tax calculated on all individual wealth above £500,000 and charged at 1% a year for five years. This would raise £260 billion; at a threshold of £2 million it would raise £80 billion.
Alternative tax rises to the one-off wealth tax which could also raise £250 billion over five years include:
Basic rate of income tax to rise by 9p (20p to 29p)
All income tax rates to rise by more than 6p
All VAT rates to rise by 6p (taking main rate from 20p to 26p)
Corporation tax to rise by 5p and VAT to rise by 4p.
The report suggests the tax would be paid after splitting the value of shared assets, such as a jointly-owned family home, exceeded the tax threshold, and only on the value of wealth above that threshold. For example, a wealth tax levied at above £500,000 would require a couple to have a net wealth of more than £1 million before any wealth tax would be payable.
To calculate the wealth tax the assets would be valued based on open market value principles – the price an asset would fetch if sold on the open market. For assets such as shares, savings and pensions the values are readily available. However, the value of the property, unlisted shares, and businesses will be less straightforward and ultimately must result in a cost with professional valuations required. Individuals owning farm and estate businesses would be those potentially worst affected by this cost.
Asset-rich farms and estate owners tend to be cash poor. Therefore, a wealth tax could require assets to be sold, if debt cannot be financed, to pay the tax. For example, assuming a husband and wife own a farm worth £3 million, and there is no possibility to borrow to pay the tax, at a threshold of £500,000 (£1 million per couple) with an annual rate of 1% for five years, over 13 acres (£7,500 per acre) of land would have to be sold to pay the tax of £100,000 (£20,000 a year).
On the above example, if bank debt was required to pay the one-off wealth tax and the bank was willing to lend the money over 20 years at 3%, then the capital repayments and interest would cost approximately £555 a month. Unfortunately, the report does not suggest there should be any relief for business assets. Therefore, a wealth tax could have implications for future investment and growth. At a time where businesses are already facing huge uncertainty following BREXIT, and as a result of Covid, limiting the ability of individuals to invest in their business seems short-sighted.