While the COVID-19 pandemic provided a surprising window for many of us to save money on a personal level, the UK’s coffers haven’t been as fortunate. There is currently a coronavirus shaped hole in the UK’s public finances, with borrowing up £350bn and the national deficit quadrupled since last year.
With such daunting figures weighing heavily on the government’s mind, new ways of pulling the country’s finances up by the bootstraps are being floated. One of those is wealth tax – a much maligned concept domestically up until recently, but a potential £55bn earner for the UK. With the idea comes plenty of questions, however – not least how feasible the idea of taxing on assets rather than income really is.
What is wealth tax?
A wealth tax is a tax on virtually all types of assets devoid of debts that a person has. In the UK, our tax system has long been based on income, with tax brackets applied to different levels of earnings. Wealth tax, however, looks to take a percentage based on assets like cash, bank deposits, shares, fixed assets, owned cars, owned property and a variety of other means.
While not prevalent in the UK or US, major countries like France, Portugal and Spain all have wealth taxes in operation.
Why is it being considered right now?
A wealth tax is something that has been dismissed in the UK for the last 50 years, so why now? Simply put, the UK is currently in dire economic straits, with the COVID impacted deficit now at 19% – the highest peacetime figure ever and twice that of the peak of the financial crash in 2008. In no uncertain terms, Boris Johnson’s government need to do something drastic to stem the financial haemorrhaging in public finances, and that’s where a potential wealth tax would come in.
Recent Research by the Wealth Commission has found a preference among the public for any tax increases to impact wealth rather than income. It’s perhaps unsurprising that a wealth tax would suit most people better than any rise in income, VAT, council or capital gains tax, but to successfully install a tax in the UK, it does need to achieve a few objectives:
- Raise substantial income
- Be fair
- Be efficient
- Be difficult to avoid.
Is it a realistic possibility?
In theory, the introduction of £55bn worth of tax sounds like the least objectionable solution, but the practicalities behind implementing one mean it remains a relatively distant possibility.
According to John Hill, Head of Proposition & Technical Research at wealth management London-based firm, Saunderson House, there are five reasons why it still remains unlikely:
- Most of the UK’s personal wealth is tied up in residences and pensions.
- Wealth can be hard to value and is often illiquid, such as in properties, defined benefit pensions and unlisted shares.
- Liquid wealth could leave the country.
- There is currently no wealth tax infrastructure in place.
- Wealth taxes have generally failed on an international level.
With such factors in mind, it would appear that the UK faces some significant hurdles in truly installing and benefitting from a wealth tax. As for those who would be most affected by it, there is little need to worry – for now.
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