So if you are one of the brave souls who still dares to read the news regularly, it’s been noticeable how often the words ‘wealth tax’ have popped up lately.
Hardly surprising I guess. Clearly the immediate focus remains on managing through the covid pandemic. But there’s also more than enough headlines about the economic impact of the numerous lock-downs and the massive amounts of money borrowed so far.
Now to be clear – I am no financial whizz with a magic crystal ball. All what follows is my own musings, opinions and likely to be best ignored. However, it doesn’t take a genius to see that the UK, and many other countries, will at some point switch their attention as to how to best balance the books.
One thing I’ve always tried to do is see which way the financial wind is blowing.
I’m fine with handling risks I can do something about. The ones that have always concerned me the most are regulatory in nature – i.e. government sprung rule changes to the game.
In this case, I figure that the bulk of the can will still continue to get kicked down the road as much as possible. But I’d also say that as and when things start to stabilise, we’re likely to see changes of some sort. And I wouldn’t be too surprised to hear the calls for a wealth tax of sorts to continue to rise.
Why A Wealth Tax?
Ask me why I think the probability of a wealth tax has increased and I’ll give you a simple answer. The UK gov is running out of other easy options to raise funds. And at the same time there’s plenty of evidence on the ever-widening gap in wealth.
It’s like back when second-home owners and buy-to-lets started to get targeted. At some point a group becomes politically acceptable, even advantageous, to go after from a financial perspective. In the same way we started selling out of UK rentals back then, I’m just keeping a thoughtful eye on what might be next.
Why do I think a wealth tax is more likely now? Well, raising tax rates on traditional sources of income would be difficult to justify. Any change to income tax or VAT is going to target people who are already struggling.
Corporation tax raises would not exactly support a struggling economy to grow or help show the UK in the business friendly light I assume it still wants to show. Yes, I’d expect to continue a display of pushing large corps to pay up but that’s not going to be adequate for the hole our government is looking at.
So if you rule out major changes to most other taxes – you get left looking at the more palatable target of wealth
Covid is a clear (hopefully) one-off situation which gives a mandate for a “one-off” solution to tackle the economic pain caused. Combine that with plenty of reports on how the rich have got richer during the whole thing and you’ve got a plausible reason that a lot of people will support.
Especially when they don’t think of themselves as ‘rich’…
What Is 'Fair' And Does It Matter?
This question has fascinated me for a long time. When you have so many different opinions, it’s practically impossible to arrive at something that everyone will think is a fair solution.
Entertainingly, it’s often joked that most people would consider a wealth tax as ‘fair’ – so long as it only applied to people richer than them. Personally I’m not sure I buy this one, I think it’s more nuanced. People tend to support those who have worked hard for their wealth. But not so much for those who haven’t.
And that’s why defining ‘fair’ is a bit of a nightmare. You can go down many rabbit holes on this one – and many people do. It’s pretty much the whole point of politics from what I see – to try and convince others that how you see things is ‘fair’ ( i.e. “right”).
I’ll be upfront here and declare I have zero party leanings. If I had my way I’d have a box on the ballot paper for ‘none of the above’ and force a revote until someone worthwhile finally stepped up. Yes, I may be waiting a while on that one….!
But that’s beside the point.
And to be honest, ultimately, I don’t think it matters what is and isn’t deemed fair in terms of assessing the risk here.
What will make a difference is what is possible and makes enough of an impact without losing voters. I.e. what matters here is what the politicians think they can get away with in the name of fairness.
What Would A Wealth Tax Target?
Again, I feel the need to remind you that this is all my own thinking. This blog is not a financial advice website by any stretch. If you are looking for something in that vein I would suggest trying Monevator or the like as a good starting pont.
What I’m about to dive into is my educated guess at where a wealth tax would focus, if one were to be brought in. I’m basing this on a combination of three things;
1. Acceptableness: As above, is this likely to deemed as ‘fair’ or targeting only the ‘right’ people?
2. Impact: Would this be likely to raise enough funds to make it worthwhile?
3. Implementation: How complicated is this to actually implement – is it actually ‘do-able’?
So let’s get into it…
The UK is particularly strong at promoting home ownership as something desirable. Championing climbing the property ladder regardless of if you actually need the extra space. Most seeing it as their pension fund through later down-sizing.
Whether you think home ownership is the best thing since sliced bread or something out-dated in these days of global mobility (well, pre the dreaded C(ovid) and B (rexit) words anyway), it doesn’t matter for the purpose of this thought exercise.
What we’re interested in is how likely it is to be included in any kind of wealth tax.
In terms of (2) above, you can see it looks tempting. The UK’s own figures show that back in 2018, 35% of the public wealth was derived from property wealth. That’s a big chunk. If you use a very rough finger in the air of 62% private home ownership (outright or mortgaged) from the latest government view I could find that ends up as £3.15 trillion, or ~21.5% of UK wealth.
It would be a mixed bag on (3) though I reckon. Whilst easy enough to identify ownership, valuing individual houses each year would be a huge task. Though you’d see a lot of estate agents happily employed I guess.
On (1) is where this one really hits the wall though. Homeowners are probably one of the toughest groups to go after in terms of a political hit. The only way I can see it would be deemed palatable would be if it clearly targeted “them there rich folk”, so introducing some kind of threshold before private property contributed to your net wealth.
But to be honest, I think if anything happens here, it will be more in line with the kinds of council tax rises already floating around – perhaps a more targeted ( i.e. higher ) increase yet for those in the higher bands.
If I lived in London or a giant house, I may be slightly more concerned, though probably not much. But I don’t. So I’m keeping this one in the minimal impact/likelihood bucket as of now.
Second (Third.. ) Homes & 'Evil' Landlords
So, I may have given myself away in the title here but it will not be a surprise to anyone who’s been involved at all in the Buy-To-Let market over the last 10-15 years in the UK. Landlords and second-home owners have been easy targets from a political perspective.
I’m not too interested in whether this is good or bad from yours or mine perspective – it’s just how it is. Anyone who can afford to own/operate a second home is going to be wealthier than the average man or woman in the street. So I don’t think anyone would argue too much that this category would tick the box for (1).
In terms answering (2) as in what it’s worth, using the two sources quoted above gives us an estimate of £1.02 – £1.93 trillion. The range being dependent on how much of social housing rentals are operated by private individuals. Not something easy to get a hold of and a little irrelevant to the main point here. Which is that second homes / BtL’s likely make up between 7-13% of the total privately owned UK wealth. So still a reasonable chunk and in an easily targeted group.
If a wealth tax were to be introduced, I wouldn’t be too surprised to see these groups included.
After all, from an implementation point of view, it’s easy to establish ownership and all landlords in particular will already be in the Self Assessment system.
But from our personal perspective, this is an area we’ve been exiting over the last few years now. For a number of reasons that deserve a whole post to go into at some point. But suffice to say we now only have one property left as a rental. So if this does become a target, we have minimal exposure at least.
Next up, private pension wealth. Going back to Table 1 here, the UK government’s latest view shows a huge 42% of private wealth is invested in pensions. So about £6.1 trillion.
That must be a really tempting target, easily meeting our (2) criteria of having a meaningful impact. And as a bonus, it’s all captured on easily accessible systems. Meeting our pragmatic implementation (3) criteria without too many issues either.
But can you imagine the outcry? Not to mention the lingering after effects on saver confidence. I think this would make for a particularly hard sell. As I said at the start, there’s a peculiar twist about targeting wealth that’s perceived to have been earned through hard work. Like saving your money whilst others are spending.
But it’s not impossible.
Strange times have already seen strange measures.
The introduction of new laws that would have been unthinkable less than a year ago. Borrowing of such huge amounts it’s difficult to visualise or really comprehend in any meaningful manner.
Personally, I think this will be a target of last resort. Perhaps only reached for if/when the UK cost of borrowing rises and it becomes impossible to service the debt anymore. A bit of a Greek situation but we’re not in that scenario, yet.
The only thing I could see happening here if the government did decide to pursue it, would be to go after a targeted subset of pensions.
Those deemed to be able to afford it. Not likely to get much public outcry or defence.
Pensions over a certain threshold wealth for example, similar to the approach you could take on private dwelling wealth. Defined Benefit pension holders another more obvious target. Though since a large proportion of those are now in the public sector, that would be an interesting mix of opinion.
But from my personal perspective? Well, I am one of those fortunate to hold a DB pension, all be it at the cost of working elsewhere for the higher salary.
But I struggle to see pensions as a target until things get even tougher. So not something I plan on doing anything about anytime soon yet.
Savings / Financial Investments
The financial wealth of the nation is where things start to get really interesting for me. With £2.12 trillion net wealth back in 2018 it was a decent (16%) slice of the cake then. And despite all the up/downs of markets this last year, there’s plenty of evidence showing that most people will have seen that wealth grow more since.
So any tax on financial investments/savings would defn be able to have a meaningful impact, making it a worthwhile one to think about.
It would be pretty simple to implement too, given everything is easily valued and all on systems.
Again though, you have that issue of not wanting to discourage savers. I imagine a reasonably high threshold would be used so as only ‘rich’ people were targeted.
And I think that’s where FIRE folk in particular could run into trouble. We’re likely to have well above the average savings given they are intended to last us the rest of our lives.
FIRE folk don’t fit into an easy or typical bucket. We’ve usually combined hard work and lots of saving to buy ourselves time instead of stuff.
That’s not what governments want from its people for sure. It’s also not likely to get a lot of support from the vast majority out there. So yeah, this one I can see us being a target for if/when it happens.
In terms of mitigation, as far as I can see it would involve becoming a non-tax resident. Which is something we’re considering anyway, though for different reasons. Though from what I’ve read the plans would involve using the last seven years of data – so it’d only be from a long-term perspective anyway. One to watch though.
As I understand it, this category is a bit of a catch all for everything else. Things like private number plates, art, wine etc. This area doesn’t seem to get a lot of attention – likely driven by it’s lower contribution (9%) to overall wealth. I also suspect that’s in large part because this is the most difficult to measure by far, since it’s driven by assets that don’t exactly have readily available liquid trading prices.
The latest resolution foundation report received a fair amount of attention earlier in the month. Highlighting a £800 billion gap between the government wealth estimations and it’s own methodology utilising the Top 100 Wealth List. My point being that it wouldn’t surprise me if a large part of that was down to missing those household valuations for their physical wealth.
Who knows. Either way, it’s still a fair chunk of value to go after.
But how would you go about valuing every single thing you owned fairly across the whole of the UK?
Simply asking people to put a value on their physical wealth for tax purpose and I suspect you’d get some pretty low valuations!
The only simple solution I can think of would be to tie it up with household insurance values. So if you want to insure £200k worth of contents, that’s how much wealth you are deemed to own. So if you undercut your valuation, you also undercut your cover/payout. Not perfect by a long stretch but perhaps do-able?
Though that wouldn’t get after a lot of that £880 billion, which I suspect is a lot more in the line of art, wine and other things fine. I imagine a lot of those types of wealth aren’t really captured anywhere until a capital gains tax is actually realised.
It would be entertaining indeed if it ended up being better to drink an investment in wine than to sell it – a whole new meaning to liquid assets!!
From our personal perspective, in true FIRE style, I don’t think we’d stack up high here. We’re not big on ‘stuff’ or ‘things’, spending our money on living life instead. Not high on my concern list.
How About An Overall Wealth Tax?
Having looked at each of the likely components individually, there are defn some areas it would be easier for a government to tackle than others.
However, most proposals are based on an individual or couples overall wealth. Similar to existing solutions in Norway, France and Spain for example.
For me, it’s implementing at that overall level where a lot of issues come in.
It’s not clear to me how you easily come up with a standard figure for net wealth for everyone. How do you put a value on every single house at the same point in time? That’s a lot of broad brush assumptions beyond even the well-known council tax banding issues. Pensions and investment wealth, yep, those you can do. But as above, I think physical wealth would be another challenge.
And then you have the challenge of the vast majority of wealth being in non-liquid assets. Pretty much every statistic you can find will confirm that most of people’s wealth is tied up in houses and pensions. That’s why these two sections make up the largest blocks of UK wealth, after all.
For example, the stereotypical granny living in a huge house in London by her own. Surviving on the state pension but all her wealth tied up in the house. How do you levy a wealth tax there? Does it just stack up as an unpaid bill until the inevitable happens and the government takes it’s cut before any inheritance gets paid out?
Or are you asking people to cash out somehow? Take on more mortgage to pay the tax bill? Would a government take a fee directly from pensions and other investments? Perhaps.
A tax on wealth seems fine when prices are going up. I think it would feel tough to be asked to lock in losses to pay your tax bill!
It’s clearly not simple. Wherever you set the threshold, there’s going to be cases that don’t feel ‘fair’. It’s just how things work. So yes, I think there’s a chance that successful FIRE people would be one of those groups, despite being in the hard work camp.
Which leaves me to finish with – do I support a wealth tax?
Do I Support A Wealth Tax?
Ask a hundred people if they support a wealth tax and you’ll get a hundred different answers I suspect. For me personally, it’s a bit of a mixed bag.
I totally accept I’m lucky enough to now be in a very privileged position. I would be deemed wealthy by most ordinary folk – though not by anybody in that Top 100 list by far! Maybe not even the Top 1m I’m pretty sure.
Anyone who knows us or who has read our story know how much work and sacrifice it took to get here. From that perspective if I’m totally honest it’s sometimes hard not to feel like we would have been better off spending instead. You can get fed up being a target for doing the responsible thing!
And I would most definitely mind less if I thought the money raised would be used wisely. However, as mentioned, I have zero faith that any government would do so. Governments are like big corporations – they just aren’t exactly effective or efficient with using money.
A wealth tax to me personally is a tax on hard work and spending less than average – without any assurance it will actually do any good.
My preference by far is to be able to use my money to help others in ways that I can actually see making a difference. Small charities not burdened by huge admin costs. That kind of thing.
But at the end of the day – I do recognise I am in a much better position than an awful lot of people who have also worked hard.
I have a lot to be grateful for and assuming it’s not a Cyprus 60% style savings raid, I can afford it. Sure, I’d like to know that any wealth tax would only go towards really helping equal things up. Really making a difference to the people on the ground. But that’s out of my control until I get that magic “vote for no-one” box..
At the end of the day, like my Twitter pal Liz of MindingMyThirties once said;
Taxes are essentially just a yearly subscription to the country you live in
The UK just needs to remain attractive enough to make the subscription worth it. Now where did I put that Portuguese visa application…… 😉