With Clegg calling for an wealth tax to fight the economic war, we look at areas where the money could come from
Revisiting the mansion tax, launching a supertax on big-ticket items and introducing a wealth tax could be ways to introduce Nick Clegg’s emergency tax on the UK’s richest people. However, none of these would provide a quick fix for the nation’s finances – and tax experts suggest that introducing a tax one year only to abolish it the next could damage the stability of the UK’s tax regime.
The deputy prime minister has said he wants to see the introduction of a “time limited contribution” from the richest to fighting the “economic war” against recession. But as he rules out an increase in the top rate of income tax – which is set to fall to 45p in the pound in April 2013 – any new tax would have to be on wealth or spending.
Spending seems an unlikely target. VAT has already increased, and research suggests it hits the poorest hardest, not the rich. Keiran Maguire, principal lecturer in accounting and finance at MMU Business School, says the government could consider a supertax on yachts, but suggest it would be likely to raise more headlines than cash. Tax on spending on homes has already been increased, in the form of the new stamp duty threshold of 7% on homes costing more than £2m, so there is little room for movement here.
This leaves a tax on held wealth. The Liberal Democrats have long called for a mansion tax, which would see an annual tax levied on properties, probably those worth more than £2m.
Maguire suggests this makes sense: “It is hard to avoid this type of tax – you can move other assets overseas but you can’t move your property from Barnes to Bordeaux” – but says there are flaws. Properties would need to be valued before the tax could be levied. Then, as with council tax valuations, there would need to an appeals procedure for those who disputed the valuation of their home. Another question, says Maguire, is “whether it is going to be a flat 1% on all homes worth over £1m, or do you have a sliding scale so that someone with a property worth more than £10m pays more?”.
Rachel Murphy, head of tax at accountancy firm Hurst, suggests the mansion tax notion could be extended to all assets, but points out that holdings such as shares are already taxed, at sale in the form of capital gains tax, plus through the tax on dividends. Adding a wealth tax would mean taxing these holdings twice.
The mechanism for collecting the tax could be straightforward though – higher rate taxpayers already file an annual tax return relating to their income, and pages could simply be added for a wealth statement. However, income tax is collected a year in arrears – if you were to try and do the same for wealth, you would be asking in January 2013 about assets held in 2011/12. People would need notice that they needed to keep the paperwork.
Several European countries have a wealth tax of this type, and Miles Dean, of Milestone International Tax Partners, says the system of annual filing seems to work. He says the level of tax is key to not putting people off living in a country, pointing out that France’s wealth tax is relatively low, at 0.25% on net assets between €1.3m and €3m and 0.5% above that. However, Dean has concerns about any large tax change being introduced as a temporary measure. “The stability of the UK as a jurisdiction for tax is something that should be protected,” he says.
Paul Smith a senior tax partner at Blick Rothenberg agrees. “We should be aiming for a stable tax regime in the UK and not one that changes with new taxes being invented every time a politician is interviewed by the media,” he says.
One potential downside of a wealth tax run in this way is that it can be problematic for people who are asset-rich but cash poor. Adam Waller of PWC says some homeowners in the south could be caught up in the tax system simply because house prices have risen, and could have to sell their asset to pay a tax bill on it.
But Waller points out there is a precedent for introducing a temporary tax to fund a battle: income tax was originally brought in to fund the Napoleonic war.