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COVID-19 has taken a toll not only on mental health and household incomes, but also on the wider UK economy. At present, total UK public debt stands at 2.077 trillion pounds; 100.8% of GDP, which is the highest it has been since World War II. Although the cost of borrowing for the government is currently low (under 2% of GDP), the Chancellor – Rishi Sunak – has admitted that the current level of borrowing to pay for furlough, low-rate business loans and other support measures is not sustainable throughout 2021.
At some point, the government will need to take action. There are a range of options available, including cutting spending and raising taxes. One idea making the media rounds is a “wealth tax”, which proponents argue could help rebuild the economy. However, what form might a tax like this take? How likely is it, and how could it affect savers, investors and middle-income families? In this article, our financial planning team explores these questions. Please contact our team here at Cedar House for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
What is the proposed wealth tax?
The idea of a wealth tax is not a new one, yet the idea came to the fore on 9th December 2020 when the Wealth Tax Commission (WTC) published a report arguing for a one-off levy to help the UK recover from debt incurred by COVID-19. In its pages, the report calls for a 5% tax on the value of individual assets above 500,000 pounds – spread out at 1% per year over 5 years.
The authors claim that this would affect 8m UK residents and raise £260bn, which would cover the £210bn in extra government borrowing attributed to the virus up to November. However, it likely would not cover the entire bill. After all, the UK government expects to borrow about £400bn by the end of 2020-21; i.e. one-fifth of the UK economy, which is the largest largest deficit in peacetime history.
Could the wealth tax work?
According to the WTC report – which was created by academics from the University of Warwick and London School of Economics – the idea would “work”, lowering UK public debt considerably if it was implemented properly. It would be hard to dodge, for instance, since individual wealth would be assessed at a particular date; i.e. it is “based on behaviour that has already occurred”.
However, many analysts have stated opposition to the idea of a wealth tax – arguing it would force many middle-income families to sell their homes, and discourage rich people from staying in the UK. There is also ideological opposition to the WTC report; i.e. why should people be punished for saving and investing responsibility?
How might it affect my wealth?
Of course, those with over £500,000 in assets (£1m for married couples) would likely face a 5% reduction in the value of the estate if this WTC proposal were implemented. This would include pensions, property, savings, business interests and investments. For those who are “asset rich but cash poor” – i.e. low in cash liquidity – this could put them into financial hardship, lowering their future retirement income or possibly requiring the family home to be sold.
How likely is a UK wealth tax in 2021?
Taxing the rich in this way enjoys broad public support amongst the British public. In the report by the WTC, survey recipients were asked which options they preferred to raise an additional £10bn per year. The least-preferred option was a 2% on the basic rate of income tax, with the idea of a 2% increase in VAT the next least-popular option. 17% thought that a 5% increase in the higher rate was a good idea, but the most popular idea by far (54%) was a “new wealth tax”.
However, Chancellor Rishi Sunak has stated his opposition to the idea. MPs have been told by the Treasury Select Committee, for instance, that a wealth tax would likely be very difficult – and expensive – to set up. Politically, for the UK government, the idea could be costly amongst its voter base as well, which comprises more pensioners and higher earners compared to Labour.
Conclusion
A one-off wealth tax has not been seriously considered for many decades – since 1974. It has already been implemented in Argentina to help pay for medical supplies as the country fights the pandemic. In the UK, however, the idea still seems remote under the current government.
Yet this is not to say that no changes are coming to the UK tax system in 2021. Indeed, many speculate that other taxes may need to rise to help address the surging public debt, such as VAT, capital gains, national insurance or income tax. Here, it can help to review your wealth and finances with an experienced professional to help ensure you are in the best position to meet the different possibilities.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk.