Understanding wealth taxes: Your questions answered

As the UK government prepares for its Autumn Budget, proposals for a wealth tax, such as a 2 per cent tax on wealth over £10 million, has made headlines.

But what is a wealth tax, how would it work, what would it mean for asset rich but cash poor individuals, and what does the experiences of countries with a wealth tax suggest?

What exactly is a wealth tax? 

A wealth tax is an annual levy on an individual’s net wealth – the total value of assets minus liabilities. Unlike income tax, which targets earnings, or capital gains tax, which applies when assets are sold, a wealth tax applies to accumulated wealth regardless of whether it generates income or changes hands. Assets typically included are property, investments, business interests and even luxury goods above certain thresholds.

How would different assets be valued?

Valuation would present the government with the most significant technical challenge. Listed securities and cash holdings are straightforward, using market values at a specific date. Real estate would likely require professional valuations, potentially updated every few years.

Private business interests create particular complexity, needing specialist valuations that consider factors like minority stake discounts and illiquidity adjustments. Many wealth tax systems exempt personal chattels below specific thresholds to avoid the administrative burden of valuing household items, though luxury assets like art or jewellery above certain values would typically require expert appraisal.

Valuation disputes could overwhelm tribunals, particularly for unique or illiquid assets where reasonable valuations might differ significantly.

How would a wealth tax affect asset-rich but cash-poor individuals?

A wealth tax creates particular challenges for individuals with significant assets but limited liquid income. Farmers, homeowners in high-value areas and business owners whose wealth is tied up in illiquid assets would might struggle to meet annual or a one-off tax liability without selling assets, potentially forcing unwanted disposals of family homes, farms or businesses.

Various solutions have been proposed internationally, including payment deferrals until asset sale, allowing tax to be paid in instalments, or accepting assets in lieu of cash payments. Some systems provide hardship provisions or allow borrowing against assets to meet tax obligations. However, each solution creates additional complexity.

What does the international experience tell us?

Several countries have wealth taxes, with others recently abolishing them. France operated a comprehensive wealth tax (ISF) from 1989 to 2017, initially applying to net wealth above €1.3 million, before replacing it with a tax on real estate wealth only, citing concerns about capital flight and administrative complexity.

Switzerland successfully maintains wealth taxes at cantonal level, with rates typically 0.3-1% and varying thresholds. The system works partly because of comprehensive wealth reporting requirements and strong enforcement capabilities.

Spain has regional wealth taxes in some autonomous communities with rates up to 3.5%, though various exemptions significantly reduce the effective tax base. Norway reintroduced a wealth tax in 2022 after abolishing it in 2001, applying 1% to net wealth above NOK 20 million. It has created considerable political tension. 

Notably, both Germany and Sweden abolished their wealth taxes (in 1997 and 2007 respectively) due to administrative costs, legal challenges and disappointing revenue yields.

Would wealthy individuals leave the UK?

International coordination becomes crucial for preventing wealth migration and ensuring effective collection. This requires robust information exchange agreements and potentially coordinated approaches with other jurisdictions to prevent avoidance through offshore structures. This would not be easy to achieve.

Anti-avoidance measures would need to address wealth being restructured into exempt forms or moved offshore, requiring complex rules around trusts, corporate structures, and beneficial ownership.

Is a wealth tax likely?

It is not official government policy and if political rhetoric is understood, would be overturned by other parties (if elected).

International experience suggests that effective wealth taxes require strong administrative capacity, comprehensive asset reporting systems and clear legal frameworks – and even then, questions remain as to whether revenue raised merits the political and economic capital it would generate.

Whilst it cannot be discounted, it is difficult to see a wealth tax becoming a reality – and even less likely in November’s Budget.

If you’re wondering how these upcoming changes may affect you, please do not hesitate to get in touch.