Footballers are not usually known for asking to pay more tax. Yet more than 100 millionaires, including Gary Lineker, wrote to the Prime Minister urging him to introduce a 2% annual wealth tax on assets worth over £10m. Backed by the Patriotic Millionaires campaign, the proposal aims to tackle inequality and fund public services.

This is not the first time such a proposal has been made. Some within Labour now advocate an annual wealth tax, already a Green Party policy. The Green Party proposal includes a 1% charge on assets above £10m, rising to 2% for assets over £1bn.

Perhaps most intriguingly, when questioned by Gary Lineker before becoming Prime Minister, Andy Burnham declined to rule out a wealth tax, suggesting that at some point his government may have to “ask for a little more”. Yet he was careful not to create new divisions or pitch people against one another. That tension between raising revenue and maintaining public support will define the debate.

Why wealth taxes are appealing

A wealth tax appears popular with the electorate, perhaps akin to Count Binface’s pledge to “cut your taxes and raise everyone else’s”. The idea is simple: target a relatively small number of very wealthy individuals and use the proceeds to fund public services, social care or infrastructure. In practice, however, nothing is that simple.

Wealth is often harder to measure than income. A salary arrives in cash. A shareholding in a family business, or a piece of farmland, does not. Valuing illiquid assets is expensive, contentious and often subjective.

Even when value can be established, collection can be difficult. Taxpayers may have substantial wealth on paper but modest cash flow, so an annual asset-based tax can create pressure to sell assets simply to pay it.

The costs of valuation and collection, plus possible behavioural change, were among the reasons that in 2020 the Wealth Tax Commission chose not to recommend an annual wealth tax. Instead, it concluded that there are easier ways to increase the tax take from wealth.

Could land value tax work like a wealth tax?

Perhaps a more targeted way of taxing wealth would be a land value tax, which Andy Burnham appears to favour. Although there is also a suggestion this might, at least to some extent, replace both Council Tax and Stamp Duty Land Tax.

Proposals suggest an annual tax as a percentage of the market value of land. Fairer Share proposes 0.48%, while Dan Neidle has suggested 1.28%. While a tax on land is difficult to avoid because land can’t be moved overseas, the practical issues on valuation and liquidity remain.

Could capital gains tax raise more revenue?

There is a growing political argument that capital gains should be taxed more like income. The most radical reform would align capital gains tax (CGT) rates with income tax rates. This creates potential problems because gains often arise over several years, so any reform would need to avoid effectively taxing inflation.

A less dramatic option would be to increase CGT rates while retaining some differential between gains and income. This would be administratively straightforward and could raise revenue without redesigning the tax system. Too large an increase, however, may reduce transactions and undermine the anticipated yield.

The rate debate is only part of the story.

Successive reviews have highlighted other areas for reform. One possibility is abolishing the adjustment to market value on death, under which inherited assets generally receive an uplift to their CGT base cost. Another is the introduction of an exit tax or deemed disposal charge when individuals leave the UK. Both would fit within a broader agenda of taxing accumulated wealth more effectively.

Inheritance tax: still the tax politicians love to hate

If CGT is one half of the capital taxes equation, inheritance tax (IHT) is the other. Any serious reform programme should examine both together as the interaction between them is too significant to ignore.

One area ripe for review is the residence nil-rate band. The relief was introduced to help families pass the family home to children or direct descendants. In reality, the tapered withdrawal for larger estates creates complexity. While taxpayers with similar levels of wealth can face different outcomes depending on assets and family circumstances.

Many would regard abolition of the residence nil-rate band as simplifying the system and making it fairer, although any such change would inevitably be politically sensitive and could place a disproportionately high burden on those whose home represents the majority of their estate.

Could a social care levy replace inheritance tax?

Perhaps the most interesting possibility is one Burnham has discussed before: replacing inheritance tax with a social care levy. IHT remains politically difficult despite affecting relatively few estates. Reframing the charge as a contribution towards social care may be easier than defending a tax many still perceive, rightly or wrongly, as a ‘death tax’ on already-taxed wealth.

A social care levy could take many forms. One option would be an additional charge alongside IHT, specifically earmarked for social care. A more radical approach would replace inheritance tax entirely with a broader-based levy linked to transfers of wealth.

This shares common ground with previous proposals from the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness, which recommended replacing IHT with a lifetime gifts tax. The theory is attractive: tax recipients over their lifetime rather than estates at death. This may also reduce the double tax problem if the CGT uplift on death were removed.

What are the options for increasing tax on wealth?

The debate triggered by the Patriotic Millionaires letter risks framing policy as a choice between introducing a wealth tax or doing nothing. The reality is more nuanced.

A government seeking to raise more revenue from accumulated wealth has several options. Each presents its own challenges. Some would raise more revenue than others, while some would be politically easier to implement. All arguably offer a more practical route than a wholly new annual wealth tax.

To return to the football analogy, a wealth tax may be the spectacular 30-yard strike that excites the crowd. Reforming CGT and IHT is more like a patient passing move: less dramatic, but often more likely to find the back of the net.

To discuss how these proposals could affect you, contact Chris Etherington or your usual RSM representative.

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