With the Government’s finances under increasing strain and little room for Chancellor Rachel Reeves to move on other taxes, calls are rising to introduce a new ‘wealth tax’.
Whilst the idea is purely speculative at the moment, it is increasingly difficult to get away from the suggestion that the Government may, at the very least, be considering it.
Wealth taxes come in a variety of forms. Indeed, several ‘wealth’-targeted taxes already exist. These include capital gains tax (CGT), inheritance tax (IHT), and stamp duty land tax (SDLT). Crucially, what makes these ‘wealth taxes’ is that they tax assets rather than income or consumption.
These taxes are largely event-driven, which means no tax is due until a triggering event. For CGT, this means on disposal of an asset which has grown in value. For IHT, that means on the death of the estate owner. SDLT is slightly different; it is only paid when purchasing a property rather than selling.
Labour’s Wealth Tax Proposals:
The imputed wealth tax which Labour is being lobbied to consider works differently. Campaign groups such as Tax Justice UK are calling for a 2% tax on assets over £10 million.
It says this would affect fewer than 20,000 people in the UK (0.04% of the population). Although the group admits this could lead to as many as 17% of those affected leaving the UK, it insists the tax will still bring in around £24 billion a year.
However, major fiscal think tanks such as the Institute for Fiscal Studies (IFS) are highly critical of this.
Stuart Adam, a senior economist at the IFS, explains:
“It is difficult to make the case that an annual tax on wealth would be a sensible part of the tax system even in principle. Taxing the same wealth every year would penalise saving and investment.
“In practice, implementing a wealth tax would be difficult. It would require the government to set up a new administrative apparatus to value wealth—and valuation would be extremely difficult for some assets, such as private businesses: it is much easier to observe and tax the stream of income they generate.
“An annual wealth tax would need to apply broadly to all assets to ensure that it was not easy to avoid. Such a tax could raise significant revenue if it applied to the bulk of the UK’s wealth—that would include the homes and pensions of the middle class. Trying to raise large amounts of revenue from only the very wealthy would make the UK a less attractive place for those people to live.
“International experience of annual wealth taxes is not encouraging: they have been abandoned in most of the developed countries that previously had them.
“There are strong reasons to radically reform how we currently tax the sources and uses of wealth; this includes reforming capital income taxes in order to properly tax high returns. An annual wealth tax would be a poor substitute for doing that.”
Is there anything you should do?
It is important at this point to not make any knee-jerk wealth decisions because of a theoretical future tax on wealth that may or may not affect you.
If you are concerned about this, or more generally about how future tax changes could affect your long-term financial plans, speaking with us is an important step to ensure you don’t face disappointment.
A financial planner can help ensure your plans account for tax liabilities, while your savings are given the best opportunity for long-term growth and income.
