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Shortly after COVID-19 broke out in 2020, national governments – including the UK – were wrestling with how to finance expensive public spending measures, such as furlough, as countries went into lockdown. In the Spring, the Wealth Tax Commission was created to explore the option of introducing a “wealth tax” to Britain.
What is a wealth tax, exactly, and how likely is it to arrive on the UK’s statute books? How might it affect your finances if such a tax was introduced? Below, our Norwich financial planners explore these questions in more detail for our clients.
We hope you benefit from these insights. If you want to discuss your financial plan with us, please get in touch to arrange a meeting with a financial adviser.
What is a wealth tax?
In the UK, most taxes apply at the point when income arrives. For instance, income tax applies when an individual receives their salary. Capital gains tax (CGT) may apply to profits earned from shares – or other assets – which are sold at a profit. Dividend tax may be due on dividend income. Value-added tax (VAT) is paid at the point of purchasing a good or service.
A wealth tax, by contrast, is a tax which is levied upon the value of assets owned by someone. For instance, suppose an individual owns an additional property which does not earn any income (e.g. from tenants). Despite the absence of income, the property itself holds a certain market value at a given time – say, £500,000. A wealth tax could impose a one-time or recurring tax upon this figure.
A minority of countries impose some form of wealth tax including Spain, Norway and Switzerland The UK, so far, has largely avoided this and relied more on income-based taxes. Arguably, the nearest thing we have to a wealth tax is inheritance tax (IHT), which is typically levied at 40% on death on the value of an individual’s estate once it exceeds £325,000. However, growing inequalities between UK demographic groups have spurred calls for the introduction of a wealth tax.
Will it arrive in the UK?
Certainly, there are a lot of voices calling for some form of UK wealth tax including the Trade Union Congress (TUC), the Wealth Tax Commission, Tax Justice UK and even the Chair of the British Medical Journal (BMJ). However, there are many obstacles to introducing a wealth tax.
In particular, many British people are averse to the idea of further taxes after dealing with the erosion of real incomes due to rising inflation since late 2021. The UK already faces its highest tax burden in nearly 70 years and even the left-leaning Labour Party appears to have ruled out a wealth tax if it wins the next general election.
However, a wealth tax could still conceivably arrive one day. If so, what form could it take and should you do anything now to protect your wealth?
Implications for financial planning
It is, of course, very difficult to prepare for an unknown future tax. Which assets would a UK wealth tax apply to, for instance? What percentage would the levy be, and would the tax be one-off or recurring?
It is worth noting that the leading calls for a UK wealth tax largely exclude pension assets. This is encouraging from a financial planning standpoint since pensions are often crucial tools for building long-term wealth and providing a sustainable income in retirement.
The Wealth Tax Commission suggests a one-off wealth tax on individual wealth over £500,000 (after mortgages and other debts, and after splitting the value of joint assets such as the family home). There could then be a 1% charge every year for 5 years. The TUC proposes a “modest” 1.7% wealth tax once an individual’s assets exceed £3m. Tax Justice UK offers the idea of a 1-2% wealth tax on assets over £10m.
These proposals suggest that most UK households do not need to fear the impact of a wealth tax anytime soon. The target appears to be a minority of UK residents whose assets start to exceed the thresholds mentioned above.
Whilst nothing is off the table in the UK’s halls of power regarding tax policy, it is worth noting that there were 12 countries with a wealth tax in 1990. Today, there are only four. The fear of capital flight seems to be a powerful policy driver.
When building a robust financial plan, it is usually sensible to try to build in some room to manoeuvre if the future tax landscape changes. For instance, diversifying your wealth across different asset classes – e.g. shares, bonds and property – helps to mitigate tax risks or changes to laws and policies associated with each one. A financial planner can help you gain a clearer picture of your assets, liabilities, and future net worth – constructing wealth prudently to help protect your goals. However, you should always bear in mind that there are rarely any guarantees with investments. Their value and any income you take could go down as well as up, and you may get back less than you originally invested.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a meeting with a financial adviser.