Will Labour’s tax plan include a wealth tax?

With a claimed black hole from the outgoing government – and a growing black hole from the current – Chancellor Rachel Reeves is on the lookout for additional tax revenues.

Ms Reeves has approved £10bn of pay rises since the new government was formed. The latest train drivers’ settlement probably ends up with more taxpayer subsidy and the NHS needs more cash to meet its pay demands.

The government has ruled out changing the main rates of Income Tax, Value Added Tax (VAT) and National Insurance – as well as ruling out increasing the burden on working people. This leaves the prospects open on raising or changing several other taxes.

It means pensioners, savers and business owners could be a target. It also leaves open changing eligibility or incidence of the big taxes. We know there will be the imposition of VAT on school fees, an increase of taxes to be paid by non-doms and an increase in windfall taxes. But what else might come our way? Here are some of Ms Reeve’s options.

What could be included in Labour's tax plan?

1. Higher capital gains tax?

The last government had already eliminated most of the tax reliefs for modest levels of gains, and there is no longer any inflation indexing so people are charged tax on changes in the nominal value not the real value.

Some in the Treasury have wanted to impose the highest marginal income tax rate of the taxpayer on their capital gains and treat gains the same as income. This would be a substantial tax rise and would make the UK a less attractive place for savers and investors.

2. Reducing pension tax reliefs

The Chancellor could seek to reduce the amount of relief the better-off enjoy through pension saving. There could be a lower limit placed on how much can be saved tax free, or the tax relief on contributions to pension funds could be limited to basic tax rate relief, whatever the marginal rate of the taxpayer.

The Treasury has often disliked the 25% tax-free cash withdrawal allowed when reaching retirement age and could cancel or reduce that. Pension savings that survive the pensioner could cease to attract inheritance tax relief.

3. Increase tax on expensive homes

There is a suggestion the government might introduce a higher council tax band to increase the charge on owners of more expensive homes or second properties. There could be a further increase in stamp duties on such home purchases, which already attract a higher tax rate.

4. Changing tax reliefs for private equity

The government could change the rules over allowable interest to seek more tax from private-equity managers and investors. The danger would be it could reduce the flow of private-equity funds into the UK corporate sector.

5. More taxes on fossil-fuel vehicles and heating

Given the slow progress in getting people to adopt electric vehicles (EVs) and heat pumps, there might be further moves to increase car tax on more expensive petrol and diesel vehicles. There could be additional tax on gas or oil heating systems. There is discussion of shifting the electricity levies to support renewable power on to general taxation away from electricity bills.

6. The carbon border adjustment mechanism

The government could go for a costly version of this proposed new tax. It takes the form of a tariff or tax on imported goods that have produced carbon dioxide in their manufacture and come from countries where there are no emissions or carbon taxes. Imports would generally become more expensive.

7. A wealth tax

Labour has not promised the left its dream of a general low percentage annual tax on people’s wealth over a certain sum. There has nonetheless been much discussion elsewhere, so it may be wise to remind ourselves of how it could work.

A wealth tax would require taxpayers to make an annual declaration of their total net wealth. They would need to procure bank statements and savings statements of all deposits and funds held, and portfolio valuations from investment managers. The government would need to decide whether tax free Individual Savings Accounts (Isas) and pension funds would be excluded or included.

Taxpayers would also need to provide a valuation of their properties and of any valuables or collections from stamps and coins to art works and other rarities. Cars and boats would need a mention. If someone owns private companies and other unquoted investments, they too will need to be valued.

This would represent a large annual burden to compile the information and satisfy the taxman that, where needed, independent and fair valuations had been procured. If the threshold for paying the tax were set too low – say to £2m or less – then someone living in a two-bed flat in central London that they owned could face a large tax bill when they may have a low pension income and no other wealth. They would face a further tax for living in their own home.

People running a small unquoted company could also face difficulties if the company was not generating much free cash but was sufficiently valuable to put them into the tax bracket. People with, say, more than £10m would be more likely to have more than one property – and have deposits or financial assets which could be used to meet the levy. A typical approach would be a tax of 1% of wealth a year.

The US Congress has recently looked at the potential of a wealth tax. It examined charging 1% a year on assets over $20m and 2% over $100m, with other permutations also considered. The idea was to keep the numbers of taxpayers involved quite small, whilst capturing large sums from those with multi-billions of wealth. This would maximise revenue in relation to costs. whilst minimising hard cases that did not have the cash to pay the bills. There are no proposals from the two US main parties to impose such a tax.

A wealth tax is a good way of putting rich people off coming and settling in a country and would encourage more better off people to look for an alternative, less intrusive and costly, place to live if one was imposed. The UK has already lost rich people through its non-dom tax changes. No G7 country charges a wealth tax and the leading world economic bodies do not recommend one. There are various other ways of taxing wealth, which the UK and other G7 economies pursue.

8. Land-value tax

Another grand tax reform scheme being discussed is imposing a tax on the value of the land someone’s home or business property occupies in place of business rates and Council Tax. Like a wealth tax, this would be a major reform and was not heralded in Labour’s manifesto. It is unlikely to be an early or easy way to more tax revenue. The government has, however, pledged to reform business rates.

There are likely to be tax rises in the budget on 30 October, given the government’s wish to spend more and their concern about the size of the deficit. It is quite likely these tax rises will be imposed on richer people, and may well entail more taxes on buying, selling and holding real estate and financial assets.

There are various changes they can make to reliefs and to rates for capital gains tax, stamp duties, Council Tax and Inheritance Tax. A full-blown wealth tax is less likely given the costs and complexities and the problems it poses for people with unquoted businesses or expensive single homes who might not have the cash to pay the bills.

To avoid hard cases any wealth tax would have to start at a high overall level of wealth of, for example, above £10m. It is very likely they will put through a carbon border tax, which will raise the costs of imports. However, any major tax reform of wealth and property would usually be put out to an extensive consultation before considering legislative change.

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