Wealth Tax Commission calls for pensions to be included in 'millionaire tax'

The Wealth Tax Commission has recommended a one-off wealth tax on ‘millionaire couples’, paid at one per cent for five years, stressing that all assets, including main homes and pension pots, should be included to ensure horizontal equity.

The recommendations were made in light of the government's response to the Covid-19 pandemic, and could raise an estimated £260bn.

Whilst the commission's report stated that it was unconvinced by the majority of arguments around the exemption of pensions, it had included special support measures around liquidity issues.

The commission noted that previous surveys have found high levels of support for a wealth tax, but clarified that these proposals had excluded the two forms of wealth individuals were most likely to posses: main homes and pensions.

For instance, it found that a recent survey conducted by Demos found that 63 per cent of adults would support a one-off wealth tax on assets over £2m, but only where excluding main homes and pensions.

It also acknowledged that there may be public pressure to exempt some types of assets, with a survey by Rowlingson, Sood and Tu highlighting pensions as the least popular asset to be included, with just 59 per cent supporting this.

However, the commission argued that these findings must be viewed in context, noting that whilst the opposition to including assets such as pensions may look “stark”, the survey wording did not include any thresholds, which may have led people to think that even a relatively modest pension could be included.

Furthermore, it emphasised that exemptions would reduce revenue, estimating that at a threshold of £500,000, for instance, exempting pensions would reduce the revenue by 54 per cent.

It also found that at this same threshold, exempting both main homes and pensions would require the tax rate on remaining taxable assets to be tripled in order to obtain the same total revenue.

The report stated: “We have heard several arguments for why pension wealth should be exempted from a wealth tax, but we do not find any of them convincing.

“The most common is that the tax system is set up to incentivise pension saving, so it would be inconsistent to include these assets in a wealth tax.

“However, the government offers many tax incentives for savings and investments, including ISAs, Enterprise Investment Scheme Relief and Business Assets Disposal Relief (formerly ‘Entrepreneurs Relief’).

“The fact that assets qualifying for these schemes have already benefited from a tax preference does not seem to us a compelling case for privileging them further.”

The commission also noted that whilst some have argued that pension wealth may not benefit the individual if they die before ever withdrawing the funds, this is the same for all assets, and it does not mean that they never really had that wealth.

Furthermore, it clarified that pension wealth can be passed on, and that inheritance tax privileges bequests of unused pension pots more than other types of asset.

The report acknowledged that there are issues around liquidity constraints, with one in two adults stating that they pension assets are their largest illiquid asset, arguing however, that this is “far less widespread than people might commonly suppose”.

“Moreover,” it added, “the likelihood of facing a liquidity constraint is highest for those with more wealth, which squarely raises the question of why and under what circumstances we should treat this as a pressing concern for a wealth tax.”

However, it has outlined “special measures” for deferring the tax attributable to pension wealth that will go beyond the five-year standard payment period, in light of issues around liquidity.

It stated: "There should be no question of exempting pension wealth altogether on account of its illiquidity.

"However, in terms of payment of a wealth tax, pensions are unique in that taxpayers would often have literally no ability to use their pension wealth to fund their tax payments.

“It is therefore not merely that liquidating this type of asset would be unpalatable (which also applies for homes and businesses) but that it is legally impossible. Unlike other illiquid assets, it is also more or less impossible to borrow against one’s pension wealth.”

The commission clarified that whilst other options had been considered, such as getting the pension scheme to pay tax from the pension fund, these could raise complicated issues and place a significant burden on pension providers.

As such, it has recommended that, by default, taxpayers under a wealth tax should be entitled to defer the tax attributable to their pension wealth until they crystallise their pension or reach state retirement age, whichever is sooner, with the tax liability becoming due at that point.

It also suggested that the tax attributable be treated as the “top slice” of tax such that pension wealth does not affect their liquidity one way or the other, with the exempt threshold allocated first against other assets.

It added: “HMRC would notify the pension fund of the tax that is due against the taxpayer’s pension so that this could be deducted automatically when the pension lump sum is paid.

"The result of this approach is that some revenue from the tax would be deferred past the end of the standard payment period.”

Despite this, the commission clarified that most people with significant pension wealth are already near retirement age, estimating that delayed revenue would amount to no more than 22 per cent of the total revenue, of which almost three quarters (74 percent) would arrive within ten years from the end of the payment period.

The commission also acknowledged that the valuation of defined benefit (DB) pension schemes could be more complex, stating however, that there are several existing purposes for which scheme providers must determine the current value of future pension entitlements, such as in a cash equivalent transfer value.

It argued that this approach would have the important benefit of ensuring, where possible, horizontal equity between defined contribution and DB pension holders.

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