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Tax Justice UK proposes wealth tax to raise £37 billion

The government could raise up to £37 billion in taxes on wealth, according to Tax Justice UK.

3 minute read

Published 15 November 2022

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TaxJustice UK proposed five steps which the new Chancellor Jeremy Hunt could take to raise this amount. The five proposed changes aim to place a greater share of the tax burden on wealth individuals. Read Partner James Austen’s thoughts on these five proposals.

– Equalize capital gains with income tax rates, raising up to £14 billion a year

JA: This move has been predicted for several years, and whilst undoubtedly unpopular among those who would pay it, there seem few arguments against it in principle, especially when the public revenue is so constrained. This is provided that taper relief and indexation allowance – which were abolished by the then-Labour government in 2008, when the rate was reduced from to 40 percent to a simple flat-rate of 18 percent – are re-introduced in parallel. The only caveat is that changes in taxpayer behaviour would most probably mean that TaxJustice’s projected revenues are likely to be a considerable overestimate.

– Apply national insurance to investment income, raising up to £8.6 billion a year

JA: This proposal illustrates the fundamental issue with National Insurance, which is essentially a supplemental income tax charge. To extend National Insurance to ‘un-earned’ (e.g. investment) income would completely undermine the stated purpose of National Insurance, which is to be a charge on employers, employees, and the self-employed, in respect of employment income, to fund actual (not hypothecated) entitlements to individual state benefits and pensions. Such a change would be inappropriate without a wholesale abolition of National Insurance (which would create other issues about entitlement to benefits and pensions) and including the charge within a reformed income tax.

– Apply a 1% wealth tax on assets over £10 million, raising up to £10 billion a year

JA: Wealth taxes are a perennial favourite with some, who tend to see wealthy individuals as the obvious source of potential tax receipts-in-waiting. This ignores the fact that many such individuals are internationally mobile, and the stability and overall effective rates of tax in each jurisdiction are an important factor in their decisions on residence. As such, taxpayer behaviour (including the departure from the UK of many High Net Worth taxpayers, who currently make significant contributions to the UK Exchequer) would significantly erode any increase in tax revenue. Practical issues arise as to how assets would be valued for this tax, and how asset-rich, cash-poor individuals could afford to pay an annual tax of this kind. Also important are the more principled objections to a wealth tax: wealthy individuals will either have built their fortune during their lifetimes (and so paid tax on income and gains as they arise) or will have inherited it (suffering IHT). Their estates will already have the prospect of IHT (a double charge to tax), and if they are to suffer a wealth tax as well, this could represent a triple charge to tax on the same amounts. No country in the world has an IHT/gift tax system like the UK’s and a wealth tax: arguably, there could be one or the other, but not both.

– End the inheritance tax loopholes that benefit the already wealthy, raising up to £1.4 billion a year.

JA: In their briefing, TaxJustice demand the reform or abolition of Agricultural Property Relief and Business Property Relief, claiming that both are used as “loopholes” by “a small minority of the very wealthy to avoid paying the appropriate inheritance tax on their assets”, which they described as an “abuse” of the current system. This is tendentious: APR and BPR exist for sound public policy reasons, recognising the long-term importance of agricultural and commercial activity to the UK. All those who currently qualify for the reliefs (whom I know from practice to be far-removed from the caricature pictured by TaxJustice) do so because they meet the strict requirements set out by the government in tax legislation. The UK already has a concept of “abusive” tax avoidance in the GAAR: the fact that this does not apply to the overwhelming majority of taxpayers qualifying for APR on their business/farming assets gives the lie to TaxJustice’s claims. In this instance, politics have blinded TaxJustice to the important public policy requirements for these reliefs, and they are wrong to call for their abolition. It is true that these (and other) reliefs can be over-complicated and burdensome in their application, with disputes about their availability becoming more common, and there is undoubtedly scope to improve the bureaucracy. In some limited cases, it would also be possible to improve how they are targeted. but it is wrong to say that they are not required in the UK’s tax system. Contrary to TaxJustice’s call, they should be retained.

– Reform the rules on non-dom status, raising up to £3.2 billion a year

JA: One should doubt very much the projected tax revenue resulting from this proposal, and the academic research paper on which it is based is not as robust as its proponents would claim. Nevertheless, it is true that the UK’s concept of domicile, and the tax and other consequences that arise from it, have developed over centuries – and a strong argument can be made that they are not fit for purpose in the complexities of the modern world. The UK’s complex historic rules on tax residence have already been updated and codified in the Statutory Residence Test, which is mostly an improvement on what went before (its shortcomings being largely due to HMRC’s addiction to unnecessary complexity instead of clear, logical, simplicity). In my view, the law on domicile – and certainly the tax consequences flowing from it – could benefit from the same approach. However, whilst the primary aspects of such a change would be relatively simple to implement, more difficult questions (e.g. about the status of “excluded property”, which is a fundamental feature of the UK’s IHT regime) would be far more technically challenging to deal with than TaxJustice and other campaigners will admit. And if any new system is to work effectively, it would be critical that appropriate care and expert advice be taken well in advance of any change in the law. These complexities mean that domicile reform should be a long-term project beginning with a Law Commission paper, and it is certainly not amenable to a quick, politically-driven, ill-considered change as seemingly advocated by TaxJustice.

Some of these comments were first published on eprivateclient in November 2022.

For more information, visit our tax & estate planning page.

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Longer Reads

Tax Justice UK proposes wealth tax to raise £37 billion

The government could raise up to £37 billion in taxes on wealth, according to Tax Justice UK.

Published 15 November 2022

Associated sectors / services

  • Private Wealth
  • Tax & Estate Planning
  • UK trusts, tax and estate planning

Authors

TaxJustice UK proposed five steps which the new Chancellor Jeremy Hunt could take to raise this amount. The five proposed changes aim to place a greater share of the tax burden on wealth individuals. Read Partner James Austen’s thoughts on these five proposals.

– Equalize capital gains with income tax rates, raising up to £14 billion a year

JA: This move has been predicted for several years, and whilst undoubtedly unpopular among those who would pay it, there seem few arguments against it in principle, especially when the public revenue is so constrained. This is provided that taper relief and indexation allowance – which were abolished by the then-Labour government in 2008, when the rate was reduced from to 40 percent to a simple flat-rate of 18 percent – are re-introduced in parallel. The only caveat is that changes in taxpayer behaviour would most probably mean that TaxJustice’s projected revenues are likely to be a considerable overestimate.

– Apply national insurance to investment income, raising up to £8.6 billion a year

JA: This proposal illustrates the fundamental issue with National Insurance, which is essentially a supplemental income tax charge. To extend National Insurance to ‘un-earned’ (e.g. investment) income would completely undermine the stated purpose of National Insurance, which is to be a charge on employers, employees, and the self-employed, in respect of employment income, to fund actual (not hypothecated) entitlements to individual state benefits and pensions. Such a change would be inappropriate without a wholesale abolition of National Insurance (which would create other issues about entitlement to benefits and pensions) and including the charge within a reformed income tax.

– Apply a 1% wealth tax on assets over £10 million, raising up to £10 billion a year

JA: Wealth taxes are a perennial favourite with some, who tend to see wealthy individuals as the obvious source of potential tax receipts-in-waiting. This ignores the fact that many such individuals are internationally mobile, and the stability and overall effective rates of tax in each jurisdiction are an important factor in their decisions on residence. As such, taxpayer behaviour (including the departure from the UK of many High Net Worth taxpayers, who currently make significant contributions to the UK Exchequer) would significantly erode any increase in tax revenue. Practical issues arise as to how assets would be valued for this tax, and how asset-rich, cash-poor individuals could afford to pay an annual tax of this kind. Also important are the more principled objections to a wealth tax: wealthy individuals will either have built their fortune during their lifetimes (and so paid tax on income and gains as they arise) or will have inherited it (suffering IHT). Their estates will already have the prospect of IHT (a double charge to tax), and if they are to suffer a wealth tax as well, this could represent a triple charge to tax on the same amounts. No country in the world has an IHT/gift tax system like the UK’s and a wealth tax: arguably, there could be one or the other, but not both.

– End the inheritance tax loopholes that benefit the already wealthy, raising up to £1.4 billion a year.

JA: In their briefing, TaxJustice demand the reform or abolition of Agricultural Property Relief and Business Property Relief, claiming that both are used as “loopholes” by “a small minority of the very wealthy to avoid paying the appropriate inheritance tax on their assets”, which they described as an “abuse” of the current system. This is tendentious: APR and BPR exist for sound public policy reasons, recognising the long-term importance of agricultural and commercial activity to the UK. All those who currently qualify for the reliefs (whom I know from practice to be far-removed from the caricature pictured by TaxJustice) do so because they meet the strict requirements set out by the government in tax legislation. The UK already has a concept of “abusive” tax avoidance in the GAAR: the fact that this does not apply to the overwhelming majority of taxpayers qualifying for APR on their business/farming assets gives the lie to TaxJustice’s claims. In this instance, politics have blinded TaxJustice to the important public policy requirements for these reliefs, and they are wrong to call for their abolition. It is true that these (and other) reliefs can be over-complicated and burdensome in their application, with disputes about their availability becoming more common, and there is undoubtedly scope to improve the bureaucracy. In some limited cases, it would also be possible to improve how they are targeted. but it is wrong to say that they are not required in the UK’s tax system. Contrary to TaxJustice’s call, they should be retained.

– Reform the rules on non-dom status, raising up to £3.2 billion a year

JA: One should doubt very much the projected tax revenue resulting from this proposal, and the academic research paper on which it is based is not as robust as its proponents would claim. Nevertheless, it is true that the UK’s concept of domicile, and the tax and other consequences that arise from it, have developed over centuries – and a strong argument can be made that they are not fit for purpose in the complexities of the modern world. The UK’s complex historic rules on tax residence have already been updated and codified in the Statutory Residence Test, which is mostly an improvement on what went before (its shortcomings being largely due to HMRC’s addiction to unnecessary complexity instead of clear, logical, simplicity). In my view, the law on domicile – and certainly the tax consequences flowing from it – could benefit from the same approach. However, whilst the primary aspects of such a change would be relatively simple to implement, more difficult questions (e.g. about the status of “excluded property”, which is a fundamental feature of the UK’s IHT regime) would be far more technically challenging to deal with than TaxJustice and other campaigners will admit. And if any new system is to work effectively, it would be critical that appropriate care and expert advice be taken well in advance of any change in the law. These complexities mean that domicile reform should be a long-term project beginning with a Law Commission paper, and it is certainly not amenable to a quick, politically-driven, ill-considered change as seemingly advocated by TaxJustice.

Some of these comments were first published on eprivateclient in November 2022.

For more information, visit our tax & estate planning page.

Associated sectors / services

  • Private Wealth
  • Tax & Estate Planning
  • UK trusts, tax and estate planning

Authors

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