Anyone looking over the financial headlines this week would be forgiven for thinking that they’d woken up in another time and place. But no, there really are serious proposals that a Conservative government imposes a wealth tax on the UK.
Anyone not in the super-wealthy bracket would also have been forgiven for believing that such a tax couldn’t possibly apply to them. Here again, they would have been wrong. To cap the strangest and most difficult of years, even the moderately well-off now have another spectre looming on their financial horizon.
For this we have the Wealth Tax Commission to thank, which in a new report suggests that people with just £500,000 (or couples with £1m) are subject to a 1% tax on all their assets to help the government mend the black hole in the public finances caused by the pandemic. That’s right, on all their assets – equity in their home and pension pots included. This being the case, it’s been reported that 10m or almost a fifth of the population would be caught in the net.
This tax grab would raise £260bn for the Exchequer, and thus make a significant dent in the £400bn (and counting) budget deficit caused by COVID; it would also be one of the biggest raids on personal wealth in history. Emergency taxes like these are more typically the stuff of wartime, or are limited to specific industries (as we saw with banks and then utilities in the 80s and 90s).
Asset rich but cash poor
Here, it would very much the middle classes that takes the hit. The Commission did consider the tax threshold being £2m (or £4m a couple), but projections of the tax take then plummeted to just £80bn over five years, so a £500,000 definition of being wealthy is where we land. I think it’s fair to say that most people with assets of half a million including their home and pension would not consider themselves rich by any stretch of the imagination, especially those in the Southeast and other property hotspots.
And therein lies the rub. Since this all-consuming tax would include property and pensions, it’s easy to see how actually paying the levy could plunge many into financial dire straits if the bulk of their wealth is illiquid – in other words, if someone is asset rich but cash poor. The report itself concedes that approaching 600,000 people may be “liquidity constrained”, which naturally includes those who have significant pension pots, but who are not of an age to access any of those funds.
For those that like to bash the rich, the optics on this wealth tax are great; not so much for those who appreciate the plight of the widow reluctant to leave her family home, the entrepreneur whose money is all tied up in their business, or indeed anyone who has worked really hard to raise themselves just a little above the norm. I foresee unjust outcomes up and down the land should this tax go ahead.
Given that this wealth tax windfall would equate to about half the country’s current total annual tax receipts, we can hope that wider consultation will rein in the “soak the rich” fervour. This proposal has huge support from the usual suspects, but critics are calling financial illiteracy with just as much vigour. As they point out, a wealth tax will feel like punishment for shrewdness, diligence and enterprise – all qualities this country will need in spades as we dig ourselves out of our financial hole – along with generating a monumental administrative bill. As recent French and Californian experience attests, the risk of capital flight to less tax-happy jurisdictions is very real too.
A wealth tax may in fact amount to an act of national self-harm. While it very much remains to be seen if it would raise anywhere near the revenue hoped for in this report, it is absolutely certain to be loathed by the half a million or more people it would hit. That most-hated levy, Inheritance Tax, would have a real contender for its crown.
Lest it be forgotten, the UK’s tax burden is already at an almost 50-year peak and we already have one of the most complex tax codes in the world. Reform may be needed, but not in this direction, and certainly not at these relatively modest levels of wealth, in my view.
I’ll be keeping a keen eye on this issue as it develops. Let’s hope this new spectre retreats back to the shadows where it belongs.
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