Wealth Tax: Q&As
Your questions answered.
An influential body of academics and tax experts has published a detailed report which explores whether a wealth tax should be introduced into the UK and, if so, how it should work.
The Wealth Tax Commission, which published the report, recommends the government should consider introducing a one-off wealth tax, but concludes that an annual wealth tax would not be as viable.
The proposed form of tax would apply to an individual’s net assets (i.e. assets less liabilities) above a certain exempt threshold. The tax would apply to the open market value of all assets including the family home, farmland, businesses and even pensions. Personal possessions with a value over £3,000 would also be included. There would be no reliefs. Instead, the system would allow deferral of payment of tax in certain cases.
The arguments for a one-off wealth tax are that it would:
· raise additional revenue,
· do so in a progressive way,
· not distort taxpayer behaviour, and
· be difficult to avoid.
The Commission argues that a wealth tax would be more efficient and fairer than raising the rates of income tax, national insurance contributions or VAT, as a wealth tax would not discourage spending or working. It proposes that a wealth tax should be introduced in preference to, or as well as, raising these rates.
A wealth tax would not solve the problem that the government spends more than it receives in tax each year (the structural deficit existed even before the coronavirus crisis). Raising the rates of income tax, national insurance contributions or VAT would be the only feasible way of doing that.
A wealth tax is far from becoming a reality. Rishi Sunak, the Chancellor of the Exchequer, has explicitly ruled an annual wealth tax out. Despite the official sounding name of the Wealth Tax Commission, it is not connected to the government and neither was its research commissioned by the government.
The report is a recommendation of an ideal wealth tax from a technical point of view. It would require a great deal of political strength and courage to implement a wealth tax in the form proposed. International experience shows that no wealth tax has been levied without some exemptions and reliefs, in contrast to the Wealth Tax Commission’s proposed structure.
Furthermore, one-off windfall taxes are relatively uncommon in recent times and where they have been introduced have applied only to certain assets rather than all wealth. That said, there was a spate of one-off wealth taxes after the Second World War; the coronavirus aftermath could be considered a comparable scenario. It should be noted that Argentina introduced a wealth tax in December. The exempt threshold is equivalent to £1.7 million with rates ranging from 2 to 3.5%, or 3 to 5.25% on assets abroad.
‘Tax the rich’ is a popular cry for many. The reality is that taxing everyone a bit more using existing taxes is the more likely and viable response to the coronavirus shock to the public finances.
A one-off wealth tax would be more like a windfall or levy, not a regular tax, though there is always the risk of government becoming dependent on the tax. Income tax, after all, was introduced as a temporary measure in 1799 and remains a one-off tax renewed each year in the Finance Act.
The Commission pours cold water on the idea of an annual wealth tax, which would see emigration of the internationally mobile and declining receipts as taxpayers rearrange their affairs. Instead, it suggests that a better alternative to another annual tax would be to make major reforms to existing taxes such as inheritance tax, income tax, capital gains tax, and council tax. These have been tinkered with piecemeal over the years and have severe shortcomings.
The report explicitly avoids recommending rates and thresholds on the basis these are a political decision.
To be most effective, there would be a relatively low threshold - £500,000 is used as an example in the report but lower and higher thresholds are also viable.
The tax rate would be in the region of 5% payable over five years and this could be a flat rate (e.g. 5% on everything) or progressive (e.g. 3% - 8%, with the higher rate on the highest bands of wealth, similar to income tax).
The proposed one-off wealth tax would be fairly simple, so professional fees would be comparatively low. Valuation costs would be higher for those with assets which are difficult to value such as art and antiques or private businesses.
If an annual wealth tax is introduced instead, it would be levied at a lower rate and a higher threshold would apply – one example used is a threshold of £2 million and a tax rate of 0.6% could raise £10 billion per year.
It is recommended that spouses would be able to share their exempt threshold.
The report acknowledges the problems of valuation and proposes various ways to mitigate them.
· Low value items under £3,000 would be disregarded.
· Assets should be valued by the highest level, so shares would be valued at company level and pensions would be valued by institutions. Residential property would be valued by the government valuation agency.
· Values could be provided by reference to bands of values which would avoid valuers having to pinpoint a specific value, saving time and cost.
The report looks at liquidity issues and offers three solutions to concerns about payment.
First, spreading the payments over a period such as five years makes the tax easier to pay. Secondly, tax on pensions would be deferred until the taxpayer crystallises their pension or reaches state retirement age. Thirdly, it should be possible to apply for deferral of payment in exceptional cases such as where the only way to fund the tax would be to sell one’s house.
The wealth tax would probably aggregate gifts to minor children with the parent’s wealth to prevent this form of ‘fragmentation’. Gifts to adult children would be effective in reducing a person’s wealth but may have costs in other taxes such as capital gains tax and inheritance tax.
No. UK residents would be taxed on their worldwide assets.
The wealth tax would apply to anyone resident in the UK on a date announced without warning. Furthermore, it would catch recent leavers such as those who had spent four of the past seven years resident in the UK, a so-called ‘backwards tail’.
Individuals who became UK resident only shortly before the announcement of the wealth tax are a trickier class to tax. It is likely that they would pay a reduced level of wealth tax.
Non-residents would still be subject to wealth tax on any UK real estate they own, even if they have never been resident in the UK. The report suggests that the wealth tax would also extend to a foreign person’s shares in foreign companies to the extent a company owns UK real estate. It also recommends possibly taxing foreigners on controlling shareholdings of UK private businesses. The report is more ambiguous as to whether the wealth tax should apply to other foreign-owned assets located in the UK such as art.
This depends on whether the settlor – the person who created the trust – can benefit from the trust (or if his spouse/civil partner or minor children can benefit). This would cause the trust to be ‘settlor-interested’.
If a trust is settlor-interested, the basic rule is that a trust’s assets would be aggregated with those of the settlor.
If the trust is not settlor-interested, the trust itself would be taxed. The trust would benefit from an exempt threshold, though that threshold would be shared between all trusts created by the settlor.
By contrast to other taxes, the status of the trustees would be irrelevant. Instead, if the settlor or the beneficiaries are UK resident, the trust would be subject to the wealth tax.
Even if the settlor and the beneficiaries are all resident outside of the UK, the trust would be liable to wealth tax on UK real estate whether owned directly or through a company.
The report implies that trusts with deceased settlors would be taxed by reference to the residence of the beneficiaries and whether the trust holds UK real estate.
A central feature of the wealth tax is that it would be announced suddenly. A one-off wealth tax would be most effective when the taxpayer has no opportunity to prepare for it.
The report proposes excluding all reliefs. If a wealth tax were introduced in that form, it would be difficult to mitigate due to the sheer simplicity of the tax, by contrast with complex inheritance tax.
The political reality, however, is that reliefs would apply if a wealth tax were introduced. Inheritance tax planning would be a good basis for wealth tax planning. Arranging one’s affairs to ensure inheritance tax reliefs are available to one’s estate is sensible in any event. Other inheritance tax planning such as using family investment companies to hold assets could bring advantages for wealth tax planning too.
Given it is difficult if not impossible to plan for a one-off tax introduced without warning, Wrigleys advises clients to look at other forms of tax planning to protect their assets, especially when lack of inheritance tax planning triggering a 40% tax bill on assets can be far more damaging than a one-off wealth tax at, say, 5%.
Changes to the capital taxes regime are much discussed professionally and politically and seem inevitable in the short to medium-term future. Planning might include:
· making gifts of assets to take advantage of the relatively low rate of capital gains tax which may rise to 45% or more;
· utilising agricultural property relief while the rules remain as generous as they are, especially for let land, with the valuable associated benefit of being able to hold over i.e. defer capital gains on a gift or transfer for no consideration; and
· ensuring family businesses receive a good capital taxes health check to ensure assets are in the most suitable ownership and the business is operating using the best legal structure or combination of structures.
If you would like to discuss any aspect of this article further, please contact Orlando Bridgeman or 0191 814 5780, or any member of the Leeds private client team on 0113 244 6100.
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The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.