The prospect of a wealth tax in the United Kingdom has been discussed for some time now. Tough economic times inevitably spark debates around inequality and whether the wealthy should contribute more to the public purse. So in a country suffering with a cost of living crisis, the possibility of increasing taxes for the better off is getting a hearing. And introducing a wealth tax is one of the more populist ideas floated by politicians who can point to similar policies already implemented abroad.
A wealth tax is generally understood to be a levy on someone’s total assets. Taxes such as capital gains tax, inheritance tax and certain bands of income tax could all be considered wealth taxes, but unlike a general wealth tax, none take a collective view of someone’s assets and extract a percentage. General wealth taxes are occasionally proposed as repeat taxes, but more often as a one-off charge. Some politicians understandably like the idea as it can make an impactful headline as well as raise funds for government coffers. But it can also be seen as hostile to wealthier members of society, encouraging them to seek alternative places to live and work. The decision to introduce one can have widespread consequences.
The political argument over the creation of a wealth tax in the UK has been predictably fraught, but the chances of one being introduced appear to have lessened for now. Neither of the main parties are currently backing a wealth tax despite its repeated appearance as a potential policy. The UK Labour Party, currently in opposition but ahead by some way in the polls, recently ruled out the introduction of a wealth tax should it gain power at the next general election, due to take place before January 28, 2025. Shadow Chancellor Rachel Reeves said at the end of August that a wealth tax was not part of its plans to govern.
“There may be a temptation for all parties to look at ways of raising money to cover rising budget deficits and that is where a wealth tax may come into play,” said London & Capital’s Sanjay Joshi, Head of Fixed income. “The ability to raise personal taxes is limited given that they are already high and from a macroeconomic perspective, a wealth tax may not be seen as impacting overall economic activity regressively.”
Home away from home
While the prospect of a general wealth tax has created some lively debate, it is not the only issue being discussed. The UK’s controversial non-dom regime has also attracted its fair share of conversation recently regarding its future. The modern non-dom regime allows UK residents who have their domicile outside of the country to only pay tax on their foreign income and capital gains if they are remitted into the country. The foreign wealth of non-doms is also exempt from inheritance tax, which currently stands at 40%. The first seven years of UK residency with non-dom status come without a fee, but if you have been a non-dom for seven of the previous nine tax years, there is a GBP 30k annual charge. This jumps to GBP 60k annually for those that have been non-doms for 12 of the last 14 tax years. The status is lost when someone has been a UK resident for 15 of the previous 20 tax years.
The last reforms to the non-dom laws were back in 2017 and involved only relatively minor changes. But the regime now looks to be under more threat than ever. The Labour Party has stated publicly that it would abolish the regime and replace it with a shorter-term alternative. The ruling Conservative Party has also in the past hinted at reforms to the regime. The non-dom regime and the wealth tax proposals are two of the most prominent parts of a wider discussion around how to treat wealth in the UK. As we approach the next election, those with an interest in the discussion will be paying close attention.