The cost of living crisis, as well as the financial cloud post-pandemic, has caused increased monetary pressures for many households. This pressure is reflected in the UK’s national debt, projected by the International Monetary Fund to increase from 103% of the UK economy’s national output, to 113% by 2028. A key tool in balancing the books for any government is taxation.
The measures seen so far include, freezing the income tax personal allowance at £12,570 (the amount above which income tax is payable). On the capital tax front, the capital gains tax exemption for each individual (the annual exemption above which capital profits are taxed) was more than halved in April 2023, to £6,000, and is set to halve again from 6 April 2024. In a similar vein, the inheritance tax nil rate band of £325,000 per person has been fixed since April 2009 and is set to remain at that level until April 2028. The policy of raising tax by cutting or freezing allowances and exemptions will bring more people into these tax regimes, but given the current economic climate, it may not necessarily end there, and other tax-raising options may be considered.
Any significant change to tax policy may only happen after the next General Election, although one tax which has been considered previously is a “wealth tax”. Currently in use in countries including Norway, Spain and Switzerland, the wealth tax generally takes the form of a tax charged on most (or all) types of asset, after deduction of debts. For example, the net wealth of a homeowner with a mortgage might be the value of the house less the outstanding loan, plus cash and investments.
In contrast to inheritance tax, which generally only applies on an individual’s death or on a lifetime transfer of wealth to a trust, a wealth tax often takes the form of a recurring charge. Implementation will be set by the government of the country concerned, including the rate of tax, thresholds above which the tax applies, and the frequency of the tax charge.
A YouGov survey published this year found that around three quarters of the public (73%) support a wealth tax of 2% on wealth above £5 million and 1% on wealth over £10 million (78%). The prospect of a wealth tax on assets over £500,000 had less support, at just over half (53%). Presumably at this level it could affect many individuals whose family home makes up the bulk of their wealth, although the Wealth Tax Commission estimated that a wealth tax of 1% on assets above this amount could raise £260bn over five years.
There have been arguments that a wealth tax would be difficult to implement (e.g. how would valuations be carried out and how would the reporting be monitored?). It could also lead to some degree of double taxation, since individuals are already subject to capital gains tax when they dispose of capital assets at a profit and may be subject to inheritance tax on assets retained in their estate until death. It has been argued that a wealth tax could disincentivise entrepreneurs, prompting them to leave the country and to take their businesses (and jobs) with them.
The current economic climate means it may be difficult for any current or future government to take tax-generating options completely off the table and the devil will be in the detail. For the individual, given the unknowns, professional advice on tax planning based on the existing tax regime would be the most sensible starting point.
*This article originally featured in The Scotsman on 12 June 2023.