How the UK's tax regime is slowing stealing your wealth (and how slow will soon turn to fast..)
The UK doesn't need a new wealth tax. It's got lots already.
Should the UK have a wealth tax? An awful lot of people think so. The most recent YouGov survey on the matter just over 50% of people being keen on an annual 1% tax on those with wealth of more than £500,000 for a period of five years; 73% of people being keen on a regular wealth tax of 2% on wealth above £5m and 78% supporting one of 1% over £10m. The clamour for the wealthy to hand over more to the state makes some sense. There has been an explosion of wealth since the beginning of the low interest rate era - and, as Bernard Connolly points out, it woudl be handy to find a way to put a one off tax on wealth generated purely from cheap money (a “jackpot tax”). But a pure wealth tax isn’t easy to manage. They are hard to calculate and collect. They tend to end up being mostly about property (which can’t move). They irritate the rich (who can move), and create all sorts of distortions as they do so. There is a reason why very few countries have wealth taxes.
However the really interesting thing about the UK and wealth taxes is that we already have several - and for all the passion people say they have for them they are remarkably unpopular. A YouGov poll last year showed that the majority of public reckon inheritance tax (the most obvious of wealth taxes) should be scrapped for example. And another showed that only 41% of people supported a sharp rise in capital gains tax such that the rates match income tax rates. For a population so apparently keen on a new wealth tax, this is really very odd. Why? Because CGT is an incredibly effective wealth tax. That was not the case a couple of decades ago. It all happened back in the 1990s when Gordon Brown’s government cut capital gains tax from 40% right down to 18%. Everyone was so thrilled by the new rate that they failed to pay any attention to the fact that he simultaneously removed the inflation indexing relief from the equation.
That was a mistake - it really matters. Imagine that you buy some shares for £20,000. Over the next ten years, inflation averages 5% a year. The value of your shares also rises by 5% a year. After a decade, you sell them for £32,940, You sell. You get £32,940. Under the old regime there would have been no tax bill. You have made no gains beyond inflation so there is nothing to tax. No more. Under today’s regime, you are liable for tax on the nominal gain - so you pay 20% on £12,940 and assuming you have used up your measly £3000 allowance you would end up with not £32,940 but £30,352. Your purchasing power - your wealth - has fallen nearly 8%. Wealth tax? Definitely. Now imagine that CGT rates are raised to your top rate of income tax. You now pay 45% on the £12940 and end up with only £27,117. Your wealth has fallen 17.6%. Nasty. Or if you are pro wealth taxes, rather nice.
More from Bernard Connolly and his ideas on jackpot taxation here on the Merryn Talks Money podcast (free to listen). https://www.bloomberg.com/merryn-talks-money-podcast
P.S. IHT and CGT aren’t the only wealth taxes the UK has. Stamp duty on housing is another obvious one - a huge sum that has to be paid in cash out of already taxed earnings. Stamp duty on shares is worth mentioning too - 0.5% of your wealth taken every time you trade. It adds up and it erodes your wealth. So it’s a wealth tax. I would also add, as an aside that if a wealth tax is in the end mostly a tax on property, the UK is already pushing the boundaries of reasonable. Our total property tax take runs to around 4% of GDP, against more like 1.5% in the EU and 2.9% across the G7. It isn’t a totally fair comparison as it included council tax which some might argue is not a property tax, but you get the idea.
I am 71 and, with my wife, own a modest house in west London that is valued at a little over £1 million. The fruits of a lifetime of earning and paying quite high rates of tax.
That wealth is entirely due to London property inflation caused by government incompetence in the failure to built new homes and immigration policy. I wish it didn't have that value because a wealth tax would be paid in cash I can't afford. In addition, the house will likely attract IHT, depriving my children, for whom high prices make it difficult for them to buy property in the south east at all. And on top of that the extortionate rate stamp duty makes the cost of 'changing down' prohibitive. My overall conclusion is that we are sitting ducks, whose capital will continue to be confiscated by government.
The only long term solution I can see, as you suggest, is to remove myself and my capital from the UK. The triggers will be any kind of wealth tax, inequitable capital gains tax or higher IHT.