In recent days, former Labour leader Lord Kinnock also suggested a wealth tax would help Labour fix the nation’s finances. Wealth is already taxed – including capital gains tax, inheritance tax, dividend tax and restrictions on pensions.
Sarah Coles, head of personal finance, Hargreaves Lansdown: “The wealth tax debate has reared its ugly head again, as questions are raised over possible ways the government might try to close the gap that has opened up after U-turns on benefits and winter fuel payments. The exact definition of ‘working people’ has also come to the fore, after the Transport Secretary suggested it was those ‘on modest incomes’ who would be protected from rising taxes. It could offer clues about the tax changes that might lie ahead.
A wealth tax is not the only avenue open to the government, which still has a variety of taxes to turn to – while still sticking to the principle of not changing income tax, VAT or employee National Insurance for ‘working people’. The reframing of the definition of the ‘working people’ protected from tax rises could mean a change to thresholds or rates on the incomes of higher-paid workers.
However, it’s worth understanding just how a wealth tax might look.
Wealth taxes
There are already wealth taxes around the world – including Spain, Switzerland and Norway. They all work differently, so there’s no one single structure to follow.
In effect, the UK already has taxes on wealth – including capital gains tax and dividend tax when you invest outside an ISA or a pension. It’s more straightforward to tinker with an existing tax than introduce a brand new one. Unfortunately for the government, this low-hanging fruit has already been picked. The tax-free allowances for both have already quartered since 2022, and when it comes to stocks and shares, the rates of both have been hiked.
Council tax also has the potential for tweaks. As Chancellor, George Osborne was said to have considered creating new levels of council tax on pricier properties – adding more bands to hike the tax on the most expensive homes. It was eventually dropped as the Conservatives had pledged not to introduce a mansion tax, but the government could choose to explore it again.
Alternatively, they could consider a completely new tax, in which case there would be some issues to tackle. If they brought in an overall tax on wealth, they would need to value everything people own. This would be incredibly difficult to administer. They could make the process easier by setting a very high bar – focusing on a much smaller number of people who might net significant amounts of tax.
The problem here is that it could encourage them to change behaviours to avoid paying the tax. They might choose to live elsewhere in the world. If there were specific exceptions, they could afford the expertise to ensure their wealth was structured in a way to minimise the tax. The government might get around this by making it a one-off tax based on historic holdings, but that might not be seen as fair by those hit out of the blue by a tax. Making a one-off retrospective charge could undermine faith and confidence in the system.
It could be particularly painful for those who are asset rich and cash poor, who could find themselves with a huge bill and no way of paying it. When a mansion tax was being proposed, one solution floated was that the bill could roll up and be paid on death. However, if it was also subject to inheritance tax, it could put an enormous dent in their estate.
However it might be structured, there'd be a risk it would put people off building wealth. If they knew assets above a particular value could land them with a tax bill, they might choose to spend the money instead. This could end up leaving them short of funds, and unable to cover their costs as they get older.”
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