In July 2020, prime minister Rishi Sunak said: “No, I do not believe that now is the time, or ever would be the time, for a wealth tax.”
However, the economy looks very different in 2023 to how it did three years earlier. Consequently, the government is under increasing pressure to find ways to manage the lasting effects of the Covid-19 pandemic, stubborn inflation, and the cost of living crisis.
While measures such as interest rate rises may help to bring inflation down, they could also lead to increased mortgage costs for many people. This may make things even more challenging for homeowners who are already struggling to meet their financial obligations due to rising living costs.
As such, some believe that a “wealth tax” – an additional tax based on the value of the assets held by an individual – is a fairer and more effective way to manage the cost of living crisis and fund support for those who need it.
Several countries around the world have already adopted this policy and introduced or increased taxes for high net worth individuals. Might the UK government change their position and do the same?
Read on to learn more about how likely a wealth tax in the UK is, and how it could affect your finances.
Countries across Europe have already introduced “wealth taxes”
The cost of living crisis has largely been driven by global events including the Covid-19 pandemic and the war in Ukraine. As such, many countries face some of the same challenges that we do in the UK.
Several governments have already adopted a wealth tax in an attempt to raise funds to support people during the cost of living crisis, including:
The way that these wealth taxes work varies depending on the country. For example, Norway, Spain, and Switzerland levy taxes on the net wealth of an individual. If an individual’s total net worth – including cash, properties, and investments – exceeds a certain threshold, they pay additional taxes on that wealth.
Other countries that have introduced a wealth tax only consider certain assets such as properties worth over a certain value, or stocks and shares. In Belgium, for instance, you must pay a 0.15% “solidarity tax” on any investment account with an average value of more than €1 million.
If the UK government introduces a wealth tax, they could opt for an annual tax of this kind, either on your total net worth or on specific assets. In this case, you may need to consider how you hold your wealth and whether the new tax would affect you or not.
For example, certain assets, such as property or stocks and shares, may become less desirable if they are subject to a specific wealth tax. Fortunately, you may be able to reduce a potential tax bill by transferring wealth and focusing on assets that are not subject to the new tax.
However, this may be more challenging if the wealth tax is calculated based on your total net worth.
The UK government introduced a windfall tax on energy providers in 2022
In May 2022, when Rishi Sunak was chancellor, he introduced a 25% windfall tax on energy companies, who saw record profits when the wholesale price of oil rose.
Jeremy Hunt increased this to 35% in January 2023. He also announced that it would remain in place until March 2028, or until oil prices dropped below a certain level for six months.
According to the BBC, this windfall tax raised £2.6 billion in the 2022/2023 tax year.
So, despite publicly stating that he doesn’t support a wealth tax, Rishi Sunak’s previous policy decisions show that the administration is prepared to levy taxes designed to redistribute wealth and ease the cost of living crisis.
This windfall tax could provide a different model for a potential wealth tax and give some insight into how the government might approach it.
Just as the windfall tax on energy companies is in place for a limited time, the government could introduce a wealth tax for a set period – until inflation falls below a certain level, for instance.
If this is the case, you may need to think about how a temporary increase in your tax bill could affect your long-term financial plan.
You could pay more tax in certain years, meaning that you are not able to contribute as much to pensions or savings. Consequently, you may need to increase contributions in the following years to ensure that you still meet your retirement savings goals.
Additionally, you may need to consider how you hold your wealth if certain assets are likely to be subject to more tax during a given period.
Research shows that there is strong public support for a wealth tax
Taxation is a contentious issue that the government will likely approach with caution. Increasing taxes can be incredibly controversial, so the decision to introduce a wealth tax will likely be driven, in part, by public opinion.
Even though many tax increases are unpopular, recent research by the Wealth Tax Commission shows that a significant proportion of the general public support additional taxes on the wealthy. The survey found:
- 63% of people support increased tax on wealth above a £750,000 threshold (excluding pensions and main residences)
- 72% of people support adding more Council Tax bands for expensive properties
- 70% of people support a “mansion tax” for expensive properties.
As a result, there may be a lot of pressure on the current, and any subsequent governments, to introduce a wealth tax in some form. Additionally, they may be more inclined to adopt the policy if they know that it is likely to be popular.
Working with a financial planner could help you prepare for tax changes
Currently, the government has no concrete plans to introduce a wealth tax. However, we cannot tell what may change in the future, especially after a general election.
Considering there is strong public support for a wealth tax and the government has already implemented similar policies such as the windfall tax, it could be a possibility.
As such, it is important to be prepared for potential tax increases so you can limit any disruption to your financial plan.
Working with a financial planner can help you prepare in several ways. Firstly, they can use cashflow planning to forecast certain scenarios, so you can see how a new wealth tax might affect you in the future.
They can also help you adjust your financial plan to ensure that your wealth is still as tax-efficient as possible, even if the government changes tax legislation.
Get in touch
If you are concerned about how tax-efficient your wealth is, we can give you some guidance.
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This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate cashflow planning, estate planning, tax planning or will writing.