How could a UK wealth tax work? The impact examined

Times

7 days ago

Rachel Reeves needs money. The government's successive U-turns on winter fuel payments and welfare combined with lower-than-expected growth forecasts mean she could be facing a £30 billion hole in the public finances come the autumn budget.
So where will the money come from? Lord Kinnock, the former Labour leader, joined unions and left-wing MPs at the weekend in calling for a wealth tax. The political logic is clear: Kinnock and others on the left believe that the wealthiest should pay the most.
The practicalities are complex. What assets would be taxed? How do you define wealth? Would it actually work, given the fact that wealthy people can choose to simply leave the country if they feel that the tax regime is too onerous.
• Neil Kinnock: Labour should bring in 'wealth tax' to balance books
A succession of countries have tried wealth taxes, only to reverse them following concerns about how much money they raised. So what are the potential options?
Capital gains tax is paid on the profit made from the sale of assets such as property, shares and other investments. Presently, it is set at a lower rate than income tax, which critics say is inherently unfair.
For example, a higher-rate taxpayer will pay just 24 per cent capital gains tax on the profit from selling a second home or shares, while if that money was income it would be taxed at 40 per cent.
Critics say the system is flawed and benefits richer people whose income is derived from assets rather than work. Angela Rayner, the deputy prime minister, suggested when in opposition that it should be levelled after Rishi Sunak, then the prime minister, disclosed that he was receiving significant sums through capital gains tax.
In a report last year, the Institute for Fiscal Studies (IFS) said differences between capital gains tax and income tax were 'unfair', creating 'undesirable distortions, including to what people invest in and how they choose to work'.
• No 10 and Treasury refuse to rule out wealth tax
A recent report by the Centre for the Analysis of Taxation suggested that reforming capital gains tax, including the equalisation of rates, would raise an additional £14 billion.
On Sunday, Kinnock suggested that Reeves should bring in a new tax on the assets of the super-wealthy that would be charged at a rate of 2 per cent on assets of more than £10 million.
He suggested it could raise as much as £11 billion for the Treasury. Supporters say the new tax would affect just 20,000 people, who would have the ability to pay without experiencing a significant change in their financial situation.
However, critics point out that the super-wealthy are also highly mobile and it could result in lower revenues for the Treasury if a significant number of those affected decide to leave the country.
The additional rate of income tax for those earning more than £125,140 is levied at 45 per cent.
Those on the left have consistently called for the rate to be raised to 50p, a rate last introduced by Labour in 2010 before being cut back in 2013 by the subsequent coalition government. Increasing the additional rate is a topic of significant contention. The Conservatives claim that a lower level brings in more income because it encourages wealthy people to stay in Britain.
The IFS previously said that increasing it would make a 'marginal contribution' to the public finances.
One of the biggest sources of wealth that most people have is their pension pots and successive chancellors have eyed this area as a potential source of additional income.
The most radical option for Reeves would be to lower the rate of tax relief on pension contributions. At the moment, higher-rate taxpayers get 40 per cent tax relief on all contributions, while basic-rate taxpayers can claim 20 per cent. The IFS has calculated that limiting upfront relief to the basic rate of income tax would raise £15 billion a year. However, it would lead to claims of double taxation because people also pay income tax on their pensions.
• Paul Johnson: Rachel Reeves will need to face up to fantasists on both sides
One less controversial reform may be to cut or abolish the £268,275 that can be taken by people from their pension pot tax-free when they retire. This subsidy has an estimated long-run annual cost of £5.5 billion and 70 per cent of the relief goes to pensions accumulated by those in the top fifth of earners.
Ed Miliband's 2015 Labour manifesto promised an annual levy on homes worth more than £2 million, promising to raise in excess of £1 billion a year.
The plan would have affected tens of thousands of properties and raised concerns about 'asset-rich, cash-poor' pensioners being forced out of their homes.
Associations with Labour's loss in the 2015 general election may dissuade ministers from returning to the idea, which progressives say should be broadened to include more fundamental reform of council taxes.
Britain has some of the highest property taxes in the developed world, but the country's biggest homes get off lightly. Despite surging house prices over the past three decades, especially in London and the southeast, rates are still fixed on 1991 values.
The biggest homes in an area pay only three times as much as the smallest, despite being far more valuable, while rates vary dramatically around the country. Infamous examples such as the three-bedroom semi in Hartlepool that pays more council tax than Buckingham Palace make the case for reform, but no government has dared since the poll tax, which contributed to the fall of Margaret Thatcher.
Adjusting the tax to reflect today's values would result in a £60 fall for the poorest tenth of households and a £750 rise for the richest, the IFS estimates.
Seeking to raise more money would push up bills further for wealthy homeowners, but lead to a furious political backlash.