The Wealth Tax Commission final report

On 9 December 2020, a group of academics and tax professionals led by Arun Advani of Warwick University, Andy Summers of LSE and the barrister Emma Chamberlain, OBE, known as the “Wealth Tax Commission”, published a much-anticipated report of their study into the possibility of a UK wealth tax. This article considers the main recommendations of the report, the likely political response and the implications for taxpayers.


There is a close link between times of economic crisis and discussion of new taxes on wealth. A UK wealth tax was first proposed in the aftermath of the Second World War, and first considered as Government policy by Harold Wilson’s administration in the mid-1970s against a backdrop of high inflation, rising unemployment and frequent large-scale strikes. At that time the policy was abandoned in the face of opposition from the Treasury.

After a long hiatus the idea has picked up momentum in recent years (along with increasing scrutiny of wealth inequality) and there was a strong indication that the Labour Party were considering the idea in 2019 (although it was not explicitly mentioned in their manifesto), coinciding with supportive analysis from a number of think tanks. It receded somewhat from view following Labour’s defeat in the subsequent general election, but concern about the state of public finances following the Covid-19 pandemic has prompted a fresh wave of speculation about potential new sources of Government revenue, including a wealth tax.

On an international level, while the introduction of wealth taxes was popular in the 1970s and 80s, few such taxes have stood the test of time. A combination of high administrative complexity and low revenue yields has seen the number of OECD members imposing annual net wealth taxes fall from 14 in 1996 to just three today. One-off taxes are less common, but there are three notable examples in recent times: a 0.6% levy on bank deposits in Italy in 1992, a 47.5% levy on bank deposits over €100,000 in Cyprus in 2013, and a 0.6% levy on private pension funds in Ireland spread between 2011 and 2015.

As in the UK, international speculation about potential measures to address shortfalls in public finances resulting from the Covid-19 pandemic has in many cases included discussion of a wealth tax. Publication of the Wealth Tax Commission’s report comes hot on the heels of the first actual announcement of a new wealth tax, in Argentina, where a one-off levy at rates up to 5.25% was passed into law on 4 December 2020.

The main recommendations

The report strongly endorses a one-off wealth tax over an annual tax. A one-off tax would require assets to be valued only once and if a comparatively high rate was used the administrative costs would represent a lower proportion of receipts than on a lower rate charged annually. The authors project that a flat rate of 5% on assets over £500,000 on an "all-inclusive" tax base could raise at least £260bn.

The report suggests that, to minimise opportunities for avoidance, any one off wealth tax should be introduced without prior warning (or perhaps retroactively), since without any knowledge of what might be taxed – or when – taxpayers would have no opportunity to rearrange their affairs or to cease UK residence in advance of the effective date of the tax.

Although the report does not consider an annual wealth tax impossible, it does not recommend one. The authors acknowledge that avoidance and administrative issues would be far more burdensome than for a one-off tax, and suggest that in the long term, reform of existing taxes on wealth (such as inheritance tax and capital gains tax) would be more straightforward and target the same taxpayer group.

Having embraced a one-off tax (and suggested a flat rate of 5% or progressive rates from 3-8%), the authors go on to propose that:

  • the tax should be levied on the worldwide assets of any individuals who were UK resident on the effective date, regardless of domicile. It could also be levied on those who were not UK resident on the effective date, but who were UK resident in at least four of the previous seven tax years (so even on those who had left the UK in the previous three years). The rate could be tapered for those who had become UK resident in the three years before the effective date, such that no charge would apply to those who arrived in the same tax year as the effective date;
  • all assets should be included in the tax base, including main homes, pensions, businesses, farms and personal items with a value over £3,000;
  • assets held in trust would give rise to a tax liability for the trustees, including non-UK trustees, (failing whom on the settlor or, in extremis, the beneficiaries) if either the settlor or any beneficiary was UK resident (based on the above test) on the effective date. In the case of discretionary trusts with a non-UK resident settlor and both UK-resident and non-UK beneficiaries, the value of the trust would be apportioned between beneficiaries equally, with tax levied only on the share attributed to the UK-resident beneficiaries. A life tenant would be treated as owning the whole of the trust fund for this purpose, but any contingent interests (including contingent interests under fully discretionary trusts) would not be taxable;
  • the tax should also be levied on UK real estate assets of non-resident individuals or trustees, even if owned indirectly through companies (reflecting the "property-rich" provisions for inheritance tax on non-domiciliaries). Controlling interests in UK companies might also be within the scope of tax for non-residents;
  • assets should be valued at “open market value” based on a hypothetical transaction with a willing buyer and seller negotiating at arms’ length; and
  • tax should be payable in instalments over five years with interest but without penalties (with tax on pensions able to be deferred until retirement or earlier drawdown) to alleviate issues with liquidity.

A number of points may be made about these proposals.

First, from a fiscal perspective the problem facing the UK Government is not the size of the national debt as such. Inflation and interest rates are low and, despite the Covid-related spike in borrowing, the UK’s debt-to-GDP ratio – although much higher than it was – is not high by international standards and, assuming interest rates remain low, looks manageable. Rather, the problem is the ongoing deficit that may result from higher spending combined with lower tax receipts in a weakened economy.

A one-off tax, however much revenue it raises, will not address this ongoing deficit. Since even the Wealth Tax Commission does not have much enthusiasm for an annual wealth tax (acknowledging that it would have significantly less revenue potential) it is not clear that a wealth tax of any kind offers a meaningful solution to the UK’s fiscal dilemma. With that in mind, the primary policy effect of a wealth tax would be redistribution. It is not the purpose of this article to offer a view on the merits of redistribution of wealth, but clearly the distinction between that and pure fiscal consolidation is a significant one.

Another issue is political. While the report cites polling data suggesting public support for a wealth tax in abstract form, it is not clear that such support would hold up in the face of detailed proposals, particularly with a threshold as low as £500,000 and the inclusion of main homes and pensions. Many people with a net worth over £500,000 may not consider themselves to be especially wealthy, and a wealth tax may be vulnerable to the "inheritance tax effect", whereby the tax is perceived as threatening and unfair even by people with little or no exposure to it. If a 5% "one-off" tax were payable in instalments of 1% every five years, it may begin to resemble an annual tax – and invite a temptation to impose a new "one-off" tax in, say, five years’ time. The report acknowledges that annual wealth taxes are fraught with avoidance, valuation and administrative difficulties and emphasises the importance of avoiding such a "mission creep" if the Government is to maintain the credibility (and thus enforceability) of the tax.

While the tax may represent a bonanza for valuation professionals, few other taxpayers are likely to welcome the requirement to identify the open market value of all their assets. The report suggests the use of "banded" valuation for lower value assets (so that a taxpayer would only have to value such assets within an approximate range), which may assist somewhat at the lower end, but would not avoid the need for some expert input in each case. The report also does not offer any solution to the problem of hard-to-value assets such as private company shares, art or intangibles such as intellectual property – it simply argues that on a one-off basis the costs of obtaining such valuations would not be disproportionate to the revenue raised. This simple argument belies the complexities of valuing these assets, and in particular the problem that there are many potential approaches to determining "open market value" which may give rise to starkly different results for different taxpayers.

The inclusion of business assets also creates a potential distortion. If tax is levied on shareholders on the open market value of a business, the cost of that tax may well need to be extracted from the business before any tax can be paid. Since tax will generally be due on distributions from businesses, the effective rate of tax on business assets would in many cases be much higher than 5%. The effect would be that wealth invested in businesses would be taxed more harshly than wealth held in cash or passive assets. In addition, the need to accelerate business distributions (and/or to reduce investment or take on more debt) to pay both wealth tax and the additional tax due on the distribution to pay the wealth tax could have knock-on economic consequences beyond the headline cost of the tax.

Likely political response

The Chancellor, Rishi Sunak, has reportedly stated that there is not now and never will be a time for a wealth tax. It is therefore very unlikely that the current Government will introduce a wealth tax in any form, let alone one as dramatic as that proposed in the Wealth Tax Commission’s report.

The Labour Party may be more interested in the proposal. Shadow Chancellor Anneliese Dodds advocated "looking at" a net wealth tax in July 2020, although the Party does not appear to have pursued that option any further thus far. The present Labour position seems to be that it is too early to introduce tax rises to pay for the pandemic, but it is at least possible that a wealth tax is something they will consider as we approach the next election. If the public finances are still in difficulty at that time, a wealth tax may be seen as a relatively voter-friendly approach to tax hikes, though it is difficult to speculate now about what form such a tax might take.

The Government is currently in the process of repealing the Fixed-term Parliaments Act, so we cannot say with certainty when the next election will be. That said, it is not expected before 2024, with late Spring and early Autumn traditionally the most popular dates. It is too early to tell whether a wealth tax will have gained any traction within the Labour Party by then. The more time that passes between the end of the Covid-19 pandemic and the announcement of a wealth tax, the more difficult it will be to justify a new tax as a means of paying for the pandemic, at least in PR terms. This means that if Labour is to introduce a wealth tax, it would likely be sold either as an exercise in redistribution of wealth or as a general means of reducing the national debt, rather than a "pandemic tax" per se.

It is however worth noting that if a new government introduced a one-off wealth tax along the lines proposed in the report, anybody who is currently UK tax resident would potentially be within the scope of the tax even if they were not UK resident next tax year.

Possible alternatives

If the current Government will not introduce a wealth tax, it naturally raises the question of what tax rises they might introduce. If the objective is to raise significant revenue on an ongoing basis, it is likely that changes would have to be made to one or more of the taxes the Conservative Party’s 2019 manifesto pledged not to raise: income tax, national insurance contributions, or VAT.

The Wealth Tax Commission estimate that to raise the £260bn they project would derive from their proposed wealth tax over five years, the Government would have to raise all income tax rates by 6p in the pound (giving a top rate of 51%), raise national insurance contributions by 8p in the pound (giving an effective maximum rate of 20%), or raise VAT by 6p in the pound (to a standard rate of 26%). Changes to the rates of these taxes would have the potential to raise money over a much longer period than five years, so the comparison is not strictly a fair one. In any event, such dramatic changes may be more likely than a wealth tax but are nonetheless not particularly likely, at least in the short term.

The Chancellor is known to be interested in narrowing the tax gap between employed and self-employed workers, which could see a rise in national insurance contributions for self-employed workers, and/or a rise in dividend rates of income tax to be closer or equal to the rates on employment income.

Another possibility is the introduction of a “solidarity tax” – an additional levy on income that is nominally a different tax (so allows the Party to claim to be honouring its pledge not to raise income tax) but takes effect as an increase in income tax and can be cosmetically tied to the pandemic.

If any of these large changes are brought in, they are likely to be accompanied or preceded by a package of reforms to other taxes designed to give the appearance that the most well-off in society are paying their share. There has already been discussion about raising the rate of corporation tax (though the Government will not want to stifle any post-pandemic economic recovery) and considerable press attention is now focusing on reforms to capital gains tax.

These reforms could include an increase in the rates of capital gains tax (alignment with income tax at up to 45% has been mooted, but a return to the 28% rate introduced in 2010 may be more likely), but also abolition of business asset disposal relief (formerly Entrepreneur’s Relief), and replacement of the base cost uplift on death with something more akin to rollover relief.

Finally, the ONS has estimated that 35% of all wealth in Great Britain derives from real property. An overhaul of council tax, introduction of a mansion tax, and (less likely) the limited imposition of capital gains tax on primary residences may all be under consideration. Some of these options may share the difficulties with valuation of a wealth tax, but all are likely to be easier to implement and less politically explosive for the Conservative Party, so must be considered more likely.

The Wealth Tax Commission’s report itself argues that reform of existing taxes would be a better route forward that an annual wealth tax. In particular, the authors criticise the asymmetry between taxation of income and capital gains and recommend both alignment of capital gains rates with income tax and abolition of the capital gains base cost uplift on death. They also draw attention to proposals to abolish business and agricultural property relief from inheritance tax and the Mirrlees Review’s suggestion of a recipient-based inheritance tax with a flat rate across all lifetime gifts and inheritances over a certain threshold.

What should I do now?

The outlook for the next year at least remains extremely uncertain and we will be closely monitoring the Government’s response to the report, but there is nothing to indicate that a one-off charge is imminent in the UK. In the event that a wealth tax is brought in on the basis recommended in this report, the authors have been clear that it should be done without prior warning (or perhaps retroactively). Changes to other taxes are more likely and taxpayers may wish to consider the implications of those changes.