Faced with significant government spending to tackle Covid-19 in the UK, the UK Wealth Tax Commission was set up to explore the desirability and feasibility of a wealth tax. The final report was issued on 9th December 2020.[1] The Evidence Papers are available here.[2]
The proposal was to implement a one-off wealth tax of 1% payable for five years based on a single valuation date. They do not provide a recommendation for the threshold but claim an individual wealth threshold of £500,000 would raise £260 billion, at a threshold of £2 million it would raise £80 billion. The Commission also rejected the implementation of an annual wealth tax.
A wealth tax has become a topical issue in Canada, with the NDP proposing the addition of an annual wealth tax of 1% of net wealth above $20 million.[3] In a recent poll by Abacus Data, 79% of Canadians supported the proposal by the NDP.[4] The UK report will be useful to consider for the application of an annual wealth tax in Canada.
Key takeaways from the report:
1) A one-off wealth tax would work if it is based on a single valuation date, ideally at the date or before the date of announcement. If there was any anticipation a wealth tax would be imposed again in the future, it would distort taxpayer’s behaviour and become ineffective. It relies on taxpayers being unable to respond before the tax is introduced.
2) Any wealth tax should provide horizontal equity. The tax base should include all assets without any exceptions. If there was an annual wealth tax without horizonal equity it would induce widespread asset-shifting.
3) A wealth tax should be based on residency (not domicile or citizenship). It was suggested it could also be pro rated for new immigrants to the UK. They also recommend a wealth tax on non-residents holding UK real estate (not UK-situs property).
4) It is estimated 1 in 14 individuals with a net worth over £500k would have liquidity issues in paying a wealth tax. This rises as the wealth increases, as 4 in 10 individuals with a net worth above £5 million would be liquidity constrained.
5) A wealth tax would likely require deferral arrangements for individuals who hold illiquid assets. The complexity of deferral arrangements would be significantly greater if an annual wealth tax were imposed due to the multiplication of base years.
6) The five-year period to pay for the one-off wealth tax strikes a balance between the taxpayer’s ability to pay and the government becoming too accustomed to the increased tax revenue.
7) It is estimated the administrative costs to the taxpayer would be 0.1%, increasing the effective tax to 1.1%.
8) The complexity of valuing illiquid property is not problematic. The UK already values property for the purpose of inheritance tax, and the property is no different under a wealth tax.
9) Several valuation concessions could be made to simplify the process. Low-value items would be excluded. Banding could be used rather than using the exact value. Valuation of financial assets could be provided directly from financial institutions.
10) The annual valuation of property for an annual wealth tax would be administratively burdensome. Concessions would need to be made such as less frequent valuations or to tolerate less accuracy.
11) If the UK implemented an annual wealth tax of 1% it would reduce the initial tax base by 7-17% within 4-8 years.
- Alex Kerslake (LLM Candidate, Osgoode Hall Law School)
[1] https://www.ukwealth.tax/
[2] https://www.ukwealth.tax/evidencepapers
[3] https://www.ndp.ca/economy
[4] https://abacusdata.ca/wealth-tax-canada-poll/