Is there an effective alternative to a wealth tax?

Rachel Reeves’ speech at the Labour party conference did not give much away on her potential plans for taxation but did note that “the Tories have piled 25 tax rises on ordinary working people and businesses while allowing the wealthiest to avoid taxes, keeping loopholes open”. Latest estimates from HMRC suggest the difference between what should be paid in tax and what is actually paid, known as the ‘tax gap’, is £35.8bn. Of this amount, about 1.4% (£0.5bn), is estimated to relate to the avoidance of income tax, National Insurance contributions and capital gains tax (CGT). There is certainly still work to be done to reduce the ‘tax gap’ arising through personal tax avoidance but the language used by the shadow chancellor suggests she intends to go further.

A wealth tax has previously been categorically ruled out by Ms Reeves but it seems increased taxes on the wealthy may form part of the plan. Looking at the experience of other countries, such as Norway where the ‘super-rich’ have reportedly left the country, one can see why the shadow chancellor has opted against a wealth tax. It can be administratively complex and burdensome to collect, potentially involving obtaining valuations of assets every year as well as being costly to administer and enforce. 

In the UK, the main tax on wealth is inheritance tax (IHT), and the outcome of the upcoming election will be crucial in determining its future. Speculation is rife that Rishi Sunak is considering scrapping IHT, and conversely that the Labour party are considering abolishing the generous IHT reliefs for business and landowners. There is little detail known around Ms Reeves’ plans but there is a lot of previous work done by bodies like the Office of Tax Simplification and the All-Party Parliamentary Group (APPG). If Ms Reeves were to follow the APPG’s proposals then it would involve big changes to the IHT reliefs that have been suggested in reports, but balanced with the introduction of a flat IHT charge on death and lifetime gifts at 10% on annual gifts over £30,000. So, this would effectively reform IHT making it more of a gift tax, with tax paid at a lower rate but potentially more frequently. 

Previous chancellors have considered increasing the rate of CGT, which was reduced to 20% (with some exceptions) by George Osborne in 2016. However, CGT is only typically payable when an asset is disposed of, and it is therefore possible for individuals to avoid paying CGT by holding on to assets. This is not necessarily helpful for economic growth and can result in a reduction of the revenues raised for the Treasury following a rate increase.

Perhaps a more creative option would be to utilise the council tax system to tax wealth instead. Reform of this system could allow a Labour government to raise revenues from wealthier individuals while confidently asserting that they have not ‘increased taxes’ (as none of the headline rates of tax would have been affected). The council tax system still uses data from 1991 to assess bandings and rates. This means that taxpayers in some of the most expensive areas of London are paying around 0.1% of the value of their property per annum, while those in poorer areas can be paying over 1%. This is therefore a regressive tax and is an area the Labour party could be seriously considering reforming.

It seems clear that Ms Reeves has more up her sleeve on tax changes than she is currently prepared to share. That can make sense politically given a general election is looming, but if significant changes to taxes like IHT and CGT are planned then it’s important there is clarity on these plans sooner rather than later as businesses need stability and to be able to plan ahead.