Wealth tax to fund Covid recovery could hit Isas and second homes

Faith Glasgow considers how a wealth tax might work in practice.

Following calls by Labour for a new “wealth tax” to help the British economy recover from the costs of the coronavirus pandemic, there has been much discussion as to what form such a tax might take. 

Labour MP Anneliese Dodds proposed in a speech on Friday that the wealthy should be taxed, calling on the government to “not increase taxes or cut support for low and middle-income people” during the crisis. She made the point that inequality of wealth has risen over the past 10 years.

Certainly, the government is likely to be reluctant to raise income tax for people who may already be struggling financially. Increasing income tax would also tend to dampen consumer spending, making it harder to open up the economy again, says Svenja Keller, head of wealth planning at Killik & Co. “Equally, increasing VAT or similar taxes would hit lower-income households harder, as lower and higher income individuals pay the same VAT on an item.”

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How would a new tax work?

The basic thinking around a wealth tax or possibly “NHS tax”, so-called because money raised would help fund the health service, is that a small percentage would be charged on the overall net asset value of wealth owned by individuals (not companies). This would include stocks, funds and other investments, cash, works of art and any other asset with a monetary value, offset against any debts.

But any proposal needs to be clear on what should and should not be included as “wealth”.

Keller points out: “If all assets are caught under a proposed wealth tax, pensions will be the most controversial and therefore unlikely to be caught. For a start, pensions are not accessible unless you are 55 or older, so this could cause liquidity issues.

“It would also put people off saving into pensions in the future and, frankly, wouldn’t be a strong political message from the government. Technically, pensions sit within a trust and not in the individual’s name anyway – it’s actually more likely that Isas may be caught under these new tax rules, as they are held in an individual’s name and accessible.” 

She adds that taxing fixed assets such as property can also be problematic owing to their illiquid nature: “There could be scenarios where individuals don’t have the cash to pay for the tax, but might hold quite a bit of wealth in property.”

It is therefore unlikely that main homes would be included, she believes, as this would cause cash flow and liquidity issues for many people and would be politically unacceptable. “Investment properties and second homes, however, may well be a valid option to ‘wealth tax’ – and it’s certainly a possibility that they will raise stamp duty again.” 

One issue that any wealth tax is likely to confront is the risk of “double-taxing” – people paying wealth tax on top of their income tax. “If you have savings from taxed income, you may be taxed on them again – as is already the case with inheritance tax,” adds Keller.

Leon Fernando Del Canto, barrister at Del Canto Chambers, points out that wealth tax has been widely imposed in Europe, but has not historically been particularly onerous. “Belgium, Italy, the Netherlands, Norway, Spain, France and Switzerland have demonstrated that the impact of wealth tax is minimal, both from a government revenue point of view and from the perspective of the taxpayer. However, it is a tax to be considered in situations such as the current one,” he says.

“According to the Organisation for Economic Cooperation and Development (OECD), wealth taxes have generally accounted for a very small share of tax revenues. In 2016, individual net wealth taxes ranged from 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. As a share of total tax revenues, they ranged from 0.5% in France to 3.7% in Switzerland.”

Del Canto says the UK should follow other countries in deciding what counts as taxable wealth. He suggests the following criteria:

• Only net assets should be taxable; i.e. total assets excluding debt
• A minimum exempted amount should be determined and that should include people’s main homes
• Regional differences should be considered
• Wealth taxes should compensate for asset-rich and cash-poor situations, and some limits must be established to avoid forced sales to pay the tax.

There have already been discussions around other possible moves to help rebuild the Treasury’s coffers, most notably changes to the state pension triple lock.

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Chancellor Rishi Sunak is due to provide an economic update tomorrow, which should give some idea of how he intends to help boost the economy in the short term. However, more fundamental measures to help rebalance the books are now expected to be put off until the Autumn Budget, says Steven Cameron, pensions director at Aegon.

He notes: “The chancellor has already shown he’s more than capable of introducing truly radical and unprecedented measures, so we could be in for some surprises. But deferring decisions until the autumn will offer Sunak more time to assess how the economy performs over the summer months as lockdown unwinds.”

Cameron adds that future changes might include “a review of the pensions tax relief system, an alignment of income tax and NI between employees and the self-employed, a recalibration of wealth taxes, or a drive to encourage pension funds to invest more in long-term infrastructure projects”.

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