As the government rules out hikes to income tax in the Autumn Budget, chancellor Rachel Reeves is reportedly turning to the UK’s wealthiest for revenue, targeting high-value homes and multi-million-pound fortunes to fill the Treasury purse.
Despite her previous dismissals of wealth taxes, Reeves is facing significant pressure to implement a wealth levy in her upcoming Budget, with calls for a 2% tax on wealth over £10m.
Research by the Fairness Foundation found that the absolute wealth gap between the richest and poorest 10% of people in the UK deepened by 54% between 2011 and 2021, due to the rising value of assets like property. Prime minister Keir Starmer has said the wealthiest have the broadest shoulders to bear the bulk of Reeves’ tax raid.
It would also likely be a popular measure amongst the public. Research by AJ Bell found that 44% of surveyed Britons said they would be in favour of a wealth tax being introduced.
However, that doesn’t mean the wealthiest will stick around to pick up the tab. Rathbones research suggests that more than £100bn of wealth could shift overseas or into less productive assets.
Laith Khalaf, head of investment analysis at AJ Bell, said: “With a large portion of tax falling on a small number of extremely wealthy individuals, it only takes a few tax whales to head for the horizon to deny the taxman a feast of blubber.”
A wealth tax would also be difficult – and expensive – to implement. Unlike inheritance tax, which is payable upon death, a wealth tax will demand constant monitoring of an individual’s evolving financial status.
Rathbones said it would cost the government around £600m to set up and leave taxpayers with an additional £700m a year bill in administrative and compliance costs.
There is also the question as to whether it works.
Rathbones analysed wealth taxes currently implemented in Spain, Norway and Switzerland, concluding that Spain and Norway raise comparatively little revenue. Only Switzerland raises significant revenue, but the analysts noted the country’s entire tax system is structured differently, with minimal taxes on income, dividends and inheritance.
Oliver Jones, head of asset allocation at Rathbones Group, said alternatives to a wealth tax may be more effective.
“This may include further changes to inheritance tax, following the reduction of various exemptions in the 2024 Budget,” he said.
“That would be cheaper and less damaging to implement. However, raising inheritance tax rates could be very challenging politically, given the evidence that it is an especially unpopular tax.”
Another – and arguably more likely – option Reeves is reportedly considering is some form of mansion tax. It is expected that Reeves will be introducing an annual 1% levy on properties valued at more than £2m – a measure that would hit fewer than 150,000 homes. However, if Reeves sets the threshold to £1.5m, this will grow to 275,000.
This would hit London hardest, with research by Enness Global revealing that two-thirds of the 1,434 properties sold over £2m this year are based in the capital.
Islay Robinson, chief executive of Enness Globa, said: “The introduction of a mansion tax could distort pricing behaviour and deter both domestic and international investment at a time when the UK needs to encourage capital inflows and restore housing confidence.”
Khalaf added that a mansion tax will “naturally” cause people on middle incomes to worry it is just “the thin end of the wedge, and the next time the government needs a bit of money they could just lower the threshold”.
In addition, all homeowners – above and below the threshold – would likely need to keep a record of the costs of improvements made to their property to offset them against any capital gains tax.
Another so-called mansion tax option reportedly being considered includes doubling the rate of council tax for band ‘G’ and band ‘H’ properties. This would impact more than 1 million families, who would see a £3,800 to £7,600 per year increase for residents in band G properties and £4,560 to £9,120 per year increase for those in band H.
In addition, Reeves may consider adding extra council tax bands for more expensive properties.
“Property taxes are highly emotive and likely to elicit a strong reaction amongst voters if they are seen to be rising,” said Khalaf. “For that reason, they would normally be a policy of last resort, except for the fact the government has repeatedly ruled out increases to income tax, national insurance or VAT.”