Wealth Tax and You

There has been a lot of talk recently about a wealth tax, including this recent poll with widespread support, and it has brought a lot of very strong opinions out from the woodwork. But what is a wealth tax, how would it work and how would it affect you? Read on to find out.

What is a Wealth Tax?

At the core, a wealth tax is exactly as it sounds – a tax on wealth. In context of current proposals that means:

• An annual tax
• Charged on a person’s total wealth 
• Subject to an allowance below which no tax is paid

The most common figures I’ve seen to date involve a 2% tax for assets over £10 million.  This means that someone worth £15 million at the time of valuation would incur a tax of 2% of £5 million, or £100,000.  This would be charged in addition to any income or capital gains taxes incurred by that person or their assets.

Someone with £5 million would pay no wealth tax under this proposal, as their wealth would be below the threshold.

There’s no draft legislation for this at the moment, but it is very likely that the calculation of someone’s net worth would allow debt to be deducted.  As such, if you have a £12 million property and a £7 million mortgage and no other assets or debts, you would not pay a wealth tax because your net wealth would be £5 million.

Those particularly familiar with UK taxes might well be thinking “isn’t inheritance tax a wealth tax?” The answer to that is yes, with the caveat that it is not the same type of wealth tax because it is not an annual tax.  As such, it is more like a one-off wealth tax, which has also been proposed by some activists.

How Would a Wealth Tax Work?

Based on the final point in the above section, the answer to this is that a wealth tax would probably work in much the same way as inheritance tax currently does.  This means that all the same requirements would hold – valuations at market value for liquid assets and independent valuations for illiquid assets like property or private businesses. 

This is the major sticking point for this type of tax, namely the administrative burden associated with valuing someone’s estate if it happens to contain a number of illiquid assets.  There are a number of ways this burden could be lessened, not least of which is the idea that valuations more than a year old could be used for certain assets, allowing owners to pay for professional valuations less frequently than annually. I would hope that the drafters of any legislation would consider the burden imposed on people with illiquid assets.

A second sticking point is what happens with people near the threshold. Someone worth £9.5 million at the start of the year might fluctuate into the £10 million range repeatedly, or they might end up with total net worth of £10,000,100 – technically this would be liable for a wealth tax of £2 under the proposals outlined above, but is this proportionate if they end up spending several hundred or thousand pounds getting their assets professionally valued?  In this case, I would hope that there is some form of sensible approach to completing a return, where someone is only expected to go through the process in full if the expectation is for at least a few thousand in tax to be generated. But that’s a much harder circle to square.

How Would a Wealth Tax Affect You?

In reality, it probably wouldn’t, unless you are one of the exceptionally lucky few with net worth of over £10 million, as under that threshold you would not be expected to pay this wealth tax.

There are some murmurs and shouts that a wealth tax would drive the super rich out of the country, that we would see a reduction in investment in UK companies as a result, and that we would see fewer jobs available as a result. I don’t think this is particularly likely.  An example I gave earlier today to someone talking about how someone with £15 million would be worse off each year as a result of the wealth tax was:

Essentially what this shows is that someone with a net worth of £15 million would pay £100,000 in wealth tax, but they would still benefit from the appreciation of their assets. In this example, I have just assumed a basic 5% growth (in pounds and pence terms, not a real growth rate that accounts for inflation), and based on that it is clear that the person with a £15 million value would be worth more after a typical year even with the tax.

This may seem a pointless example, but it is worth remembering this when people say that wealthy people will leave. They might, but if they do, they will be leaving a situation where they could still make a small fortune each year just by having a significant net worth – after all, a 5% investment return is achievable while doing essentially nothing if you pick a sound, diversified investment strategy and have a long enough time horizon. Some may still leave, but some rich people leave the country every year. We rarely notice from a jobs perspective.

Could a Wealth Tax Work?

In terms of administration, probably yes. There are complications to introducing a wealth tax, but certainly not insurmountable ones. On top of that, the number of people this would actually affect is a pretty small proportion of the population, so it would definitely be possible to assign a proportionally high number of HMRC staff to oversee this particular tax.  Whether the government actually does that is of course another question altogether, and one that I cannot really answer right now.

In terms of whether the tax would be a success? That’s another matter altogether, and there are wildly differing opinions on how successful this sort of tax could be and whether it would be repealed by the next government. I have my own views on whether this could work, but those are probably better suited to one of my political soapboxes.

For now, I plan to keep my eye on developments as they happen and to watch out for what a wealth tax might mean for my clients. As always, if you’d like to discuss this or any other aspect of financial planning, please get in touch.