A new tax on wealth is being considered and a report by The Wealth Tax Commission has been released this month making recommendations to the Government. To find out how such changes could affect you as a taxpayer and whether you should review your estate and tax planning strategies, read our summary of what is being considered, how it would work and what steps you can take.
The Wealth Tax Commission’s (“the Commission”) full report on proposals for a UK Wealth Tax was released on 9 December 2020 (“the Report”), making its recommendations to the Government.
Whilst the Report acknowledges that Chancellor Rishi Sunak has said he does not believe now is the time for a Wealth Tax, it also highlights that the country’s circumstances have changed. The budget deficit is approaching a peacetime record, with borrowing between April and October 2020 at £260.9bn, and public sector net debt is now reported to be £2,076bn.
What is being considered?
What is being considered is either a one-off tax on net wealth above a certain threshold or an annual tax on the same (with certain adjustments). The Report identifies public support generally for a tax of this nature, rather than a new tax or increased tax on income.
The point of a one-off Wealth Tax is to raise a substantial amount of revenue, to begin addressing the public-sector borrowing and debt position, particularly in response to the Coronavirus pandemic. The Report has found that a one-off Wealth Tax could achieve that - At a threshold of £500,000, and charged at 1% a year for five years, a one-off Wealth Tax would raise £260 billion; at a threshold of £2 million a one-off wealth tax would raise £80 billion.
The Commission prefers a one-off Wealth Tax when compared to an annual tax on wealth, considering it “progressive”, and it is worth noting that the UK has had one-off taxes in the past.
How a one-off tax would work
The Report identifies key principles of the one-off tax:
- “Tax should be levied on an individual rather than on a household basis”. This is a key feature of most other taxes but could prove a particular issue for many households where there is an imbalance of wealth, particularly between spouses and civil partners.
- “A one-off wealth tax should include all property of an individual in the tax base”. This is likely to be an issue for many taxpayers who are “capital-rich”, including farmers (who will be coming under increased pressure because of changes to subsidies and the effects of Brexit) and many in ‘middle-Britain’ due to the significant increase in house prices in recent years.
- “Assets should be valued based on their open market value (OMV)”. The Report proposes that the “value of housing and land would in the first instance be calculated by the Valuation Office Agency (VOA)”, with a right to challenge that if a taxpayer believed the valuation was incorrect. Business interests would also need to be professionally valued. This represents a particular area of concern. If valuations in respect of a deceased’s estate are anything to go by, it is likely that there will be challenges to the values provided by the VOA. This is likely to increase costs for the taxpayer and HMRC and decrease the effectiveness of the tax.
- “Payments could be deferred by those who are liquidity constrained (‘asset-rich-cash-poor’)” – The Report suggests that pensions would have a deferral system so that tax could be taken at the point a lump sum is taken; that the standard payment period would be 5 years; and where taxpayers do have serious issues raising the cash to pay, a system for a further deferral of payment should be included.
An annual tax on wealth
One positive of the Report is that an annual tax on wealth is, generally, discouraged. It seems the Commission thinks such a tax would be fraught with problems and disadvantages.
Quite rightly, the Commission notes that the case for or against either tax is complicated. A Wealth Tax like other taxes, “reduces the value of work”. It also impacts savings decisions and therefore runs the risk of putting greater strain on the Government in terms of social security, at a time when there is increasing pressure on state pensions, the NHS and care for the elderly and vulnerable.
The Commission also makes recommendations for a reform of the taxes we have now including IHT, CGT, Income Tax (on investment income) and Council Tax, which the Report says, “currently lack a clear set of objectives”. If we consider the Report’s comments in light of those made in the recent Office of Tax Simplification reports, it is surely only a matter of time before we get substantial changes to, in particular, IHT and CGT. Taxpayers concerned about such changes should therefore begin to review their estate and tax planning strategies.
It is specifically noted that a one-off tax, “relies on people not being able to respond before the tax is introduced.” This makes planning for taxpayers incredibly difficult (on purpose). In terms of what can be done, spreading wealth between ‘individuals’ is a possible option. However, this should not be carried out without proper consideration of other estate and business planning issues such as:
- Should gifts be absolute or by way of trust/Family Investment Company, and what additional administration and costs will arise?
- If you give away shares or an interest in a business, what impact will that have in respect of control, what happens if you have a dispute with the recipient if they get divorced or die?
- Do you still need to benefit from the asset given away? Would you access to that capital in retirement? Have you considered the impact of a care fee assessment?
- Has the recipient put in place a Will and Lasting Power of Attorney to deal with that asset should they die or lose capacity?
- What immediate and longer-term tax concerns will result from transferring wealth?
The Report makes it clear that trusts will not escape a Wealth Tax (one-off or annual) and recommends that the tax would be based on (a) where the assets are located and (b) the residence of the beneficiaries and settlor (the person or persons who provide funds to a trust). The Report makes it clear that Trusts are still a potential avenue for planning in respect of a Wealth Tax. However, the comments in respect of the effect a Wealth Tax will have on trusts, mean it is also imperative that taxpayers and trustees of existing trusts take advice on how these proposals may affect them.