Wealth tax reforms could result in an extra £7bn a year of taxation
Death and taxes. The only two things said to be certain in life.
As the country moves ever closer towards an exit from the European Union, and the economy shows little sign of sustained improvement, there’s a reasonably well founded fear of higher taxes ahead.
Chancellor Philip Hammond explained in the Budget in October that he would consider turning his Spring Statement this year into a ‘full fiscal event’ depending on the outcome of Brexit.
This means there’s a good chance of an emergency Budget coming along in the next few months.
But how might the Chancellor increase the tax take for the Treasury? The Resolution Foundation has come up with a few suggestions.
According to the think tank, HM Treasury could raise almost £7bn a year more in taxes by 2022/23 by tightening up five of Britain’s existing wealth taxes and subsidies.
In this blog post, we take a closer look at these ideas and what they could mean for your personal financial planning.
The Foundation says that while the first three months of this year will inevitably be dominated by Brexit, the last three months of 2019 are likely to be dominated by the Spending Review, as the Chancellor sets out his spending priorities for the remainder of the parliament.
One of the biggest challenges for this and future spending reviews, the Foundation says, is how to fund the rising cost of public service provision as the population ages.
It notes that this demographic headwind and rising health cost pressures are set to increase the cost of the current welfare state by £36bn a year by 2030, and by £83bn by 2040.
This figure for 2040 is equivalent to almost doubling the basic rate of income tax, from 20p to 39p, if funded entirely through income tax, rather than wealth taxes.
As a result, wealth taxes are the more likely target of future tax rises.
In their briefing note, the Foundation points out that Britain’s record £13 trillion of wealth is currently undertaxed, relative to the size of the overall economy.
This, according to the Foundation, should prompt a wider debate about the role of wealth taxes.
According to the Foundation, there is a strong case for scrapping council tax and inheritance tax altogether, and replacing them with a genuine property tax and a Lifetime Receipts Tax.
Five wealth tax proposals
The first change they propose is limiting entrepreneurs’ relief.
This is a tax break associated with capital gains tax, reducing the rate of CGT to 10% on the sale of qualifying business assets of up to £10m.
Recent figures suggest the cost of entrepreneurs’ relief is expected to rise to £3.9bn in 2023/24, with three-quarters of that relief going to just 5,000 business owners.
By returning the lifetime cap for entrepreneurs’ relief back to £1m, from its current level of £10m, HM Treasury would save £1.6bn a year.
The second measure is to ‘go Scottish’ on council tax.
The Foundation describes council tax as Britain’s biggest and arguably worst wealth tax.
By replicating recent council tax reforms from Scotland in England, which included increasing the top bands only, HM Treasury would raise £1.4bn a year.
Money raised through this reform could also be spent on cutting council tax on lower band properties.
The third proposed measure is to clamp down on inheritance tax loopholes.
By freezing the nil rate band for inheritance tax after 2020, the government would raise £200m a year.
Introducing a ‘farmer test’ and increasing minimum ownership periods for agricultural and business property reliefs, which together cost £1.2bn a year, would also help prevent super-rich individuals from using these reliefs to avoid paying inheritance tax and would raise £500m a year.
Proposal number four is to make pension taxation more progressive.
The Foundation says that, by making tax relief on pensions slightly less skewed towards the richest households by capping the tax-free cash amount at £40,000, the Treasury would raise £2bn a year.
Finally, the Foundation suggests scrapping the types of Individual Savings Accounts (ISAs) previously introduced by George Osborne.
Despite supporting action to help younger people onto the housing ladder, they believe there are far more effective measures than the Lifetime ISA and Help to Buy ISAs.
According to the Foundation, both are poorly targeted and very expensive. By scrapping them both, the government would save £900m a year.
Soaring British wealth
Torsten Bell, Director of the Resolution Foundation, said:
Britain has unfortunately got used to weak income growth but soaring wealth, which is now worth seven times the size of our economy. It’s time our tax system caught up with that fact.
Maintaining our valued public services in the face of the big cost pressures of an ageing population, requires better wealth taxation to help fund this gap.
Yes this is politically difficult, but the good news is that relatively large sums can be raised simply by tightening up our existing wealth taxes and subsidies. That is how we protect our public services without placing all the burden of taxation on hard earned income from work.
Adam Corlett, Senior Economic Analyst at the Resolution Foundation, said:
Britain’s wealth is undertaxed, and the wealth taxes we do have are in serious need of reform.
There’s a strong case for scrapping council tax and inheritance tax altogether, and replacing them with proper wealth taxes that are more progressive and harder to avoid.
The Chancellor can make small steps in this direction by tightening up five of our existing wealth taxes and subsidies – raising almost £7bn in the process.
What do you think of these proposals?
In our view, capping tax-free cash from pension pots at just £40,000 would be the least popular measure of the five.
Ahead of every Budget there is a fear that the Chancellor will tinker with tax-free cash from pensions, and this proposal will no doubt stoke that fear ahead of the next Budget.
The other four measures put forward by the Foundation seem reasonably sensible and probably less damaging for the personal wealth of most of our clients.
The report does though serve as a useful reminder that taxation policy is subject to regular change and review.
When economic times are tight, we might expect the tax burden to rise. A change in the political party in government might also prompt a tightening of taxation.
Depending on the outcome of Brexit, both economic and political prospects are potentially unsettled.These five proposals for wealth tax reforms could result in an extra £7bn a year of taxation Click To Tweet