Experts’ concerns about wealth tax should give ambitious new Prime Minister pause for thought, writes David J Alexander.
News that high-profile advisers to Andy Burnham have decided not to join his government because they are concerned about introducing a wealth tax will make many wonder what the Prime Minister is now planning for October’s Budget. Lord Jim O’Neill, former Bank of England chief economist Andy Haldane, and ex-Office of Budget Responsibility chair Richard Hughes have all been advising Burnham over the last few months but, one month into his premiership, they have not joined the government.
Yet rumours continue about which areas Burnham is thinking of taxing. Hemmed in by his commitment to keep to Labour’s manifesto pledges on not raising personal tax, National Insurance or VAT he has limited choices in how he can raise revenue for his ambitious plans, including creating a national care service at an estimated cost of £18.7 billion a year by 2035.
The question is, therefore, where can he raise enormous sums without touching the key tax raising measures? It increasingly looks likely that assets, specifically homes, will be one of the targets in the October budget. While the Prime Minister has specifically ruled out any changes to stamp duty in this budget rumours persist about changes to capital gains tax (CGT) and Inheritance Tax (IHT), both of which have the potential to have a major impact on the housing market.
There remains speculation that the government could change the way homes are treated for CGT purposes and implement a tax on the difference between purchase price and the value at death. If this were to occur and CGT be applied at 24 per cent, many estates could be crippled by the resultant tax.
Many individuals have owned their home for decades and seen large increases in value (much of this through inflation) and their estates could be liable for tens, or even hundreds, of thousands of pounds.
Burnham is thought to also be considering replacing IHT with a flat rated charge of 10 per cent to fund his national care service proposal. Coupled with the CGT levy this would mean over a third of the value of an affected estate could be charged in tax.
Introducing these changes to the property market would be catastrophic for many people, who will have assumed that their life of homebuying, of saving, and investing will have come to nothing at the stroke of a pen and that their relatives will lose a substantial percentage of an estate to more taxes.
The impact on the housing sector could be catastrophic, with people selling up prior to the deadline for CGT implementation or, if they are able, putting off selling their home until after the next election, when they might hope a more sympathetic government is in power. Either way the market will be in chaos for years to come if such measures are introduced.
There will also never be the tax take that is forecast as individuals will change their circumstances and behaviour. The truth is that most peoples’ estates are the result of a lifetime of work and saving, and their efforts could be destroyed by these additional charges on home ownership.
Perhaps Mr Burnham should heed the words of his advisors.
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