I’ve been following proposals to introduce a UK wealth tax with interest. The announcement yesterday to introduce a one-off 5% charge on those with assets of more than 500,000 however is ridiculous in the extreme as I explained below.
Firstly, and I can only assume this is due to the greatest levels of self-interest, it ignores defined benefit pension wealth. Defined benefit pensions already uniquely privileged, due to the guarantees provided and a higher effective lifetime allowance (the greatest sum that could be built up in a pension scheme without further tax charges), so they need no further tax incentives.
The obvious issue that follows this point is the ability to pay the tax: I have a number of clients who are retired, living off fixed income, for example the teacher’s pension. By virtue of living in areas such as South London their modest family homes are sometimes worth £1 million-£2 million. They have no liquid assets and therefore no ability to fund a wealth charge of this nature. The tax could be the equivalent of one or two years of net income!
The maths of the tax appear to work, as although the national debt is around £1 trillion if the intent is just to pay off that which has been accrued by the Coronavirus provisions, estimates suggest somewhere between ¼ and 1/3 of this would be paid off by the introduction of this one-off tax.
However, why is nothing being done about the rest of the national debt? And given the very low cost of servicing this debt, is clearing the debt the right thing to do particularly if it forces individuals into financial hardship, or causes recessionary pressures as they incur debt to pay the liability?
As I said in the pages this blog before, it’s perfectly reasonable that the government decide to take no action in increasing taxes, nor reducing spending, but let inflation run rampant for a period to reduce the cost of the debt in real money terms, and done well this could be imminently sensible.
None of this excludes the gradual introduction of an annual wealth tax, which despite being hard to minister due to variations in value, should not necessarily be ruled out. One-off taxes as the kind detailed in this report are almost always unfair, and should be discouraged in the strongest possible terms.