How a UK wealth tax could work

With Chancellor Rachel Reeves under more pressure to balance the nation's books, a wealth tax has been floated as a viable option.

Former Labour leader Lord Kinnock told Sky News that a wealth tax would be a "substantial gesture in the direction of equity fairness".

He suggested "a good way of raising funding" would be to introduce a 2% tax on assets above around £10 million.

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Reeves previously shunned interest in such a levy, but the prime minister's official spokesperson refused to rule out a wealth tax in the next Budget.

The suggestion comes amid "speculation" of new tax increases, said Yahoo Finance, as the recent Labour U-Turn had "severely diluted" the government's original controversial plans for welfare reforms.

What is a wealth tax?

The idea behind a wealth tax is that imposing an extra levy on the super-rich will "raise the necessary funds" and also tackle rising inequality, said ThisIsMoney.

Estimates about the impact of a wealth tax vary, said The i paper, but the "broad consensus from economists" is that a "carefully targeted" wealth tax could raise around £10 billion a year.

How would a wealth tax work?

Unlike capital gains or inheritance taxes, which target assets, The Wealth Tax Commission said, back in 2020, that the charge would be a "broad-based tax on the ownership of net wealth" based on the value of a person's assets minus any debts.

The group suggested it could be charged as a one-off or annually. It calculated that a tax on all individual wealth above £500,000 at 1% a year for five years could raise £260 billion. If set above assets worth £2 million, the levy could raise £80 billion.

Alternatively, a study of The Sunday Times Rich List by Ben Tippet, lecturer in economics and wealth inequality at King's College London, found "at least £160 billion" could have been raised over the past three decades if the richest had paid a 2% wealth tax on their assets above £10 million.

Pros and cons of a wealth tax

A wealth tax could help tackle inequality and collect significant sums for the government. However, one of the "main criticisms" is that wealthy people could just "relocate their assets or themselves", said The i paper.

Migration advisory firm Henley & Partners has already warned that record numbers of wealthy people are "fleeing the UK amid rising taxes and the end of non-dom status", said MoneyWeek.

But the "vast majority" of the extremely wealthy would never leave for "tax reasons", according to a study by the London School of Economics last year, as many of the "tax advantageous" destinations are seen as "boring" and "culturally barren".

Only four countries have actually "retained a wealth tax”, said ThisisMoney: Norway, Spain, Colombia and Switzerland. Other nations have tried but failed as the wealthy avoid them and the levy raises "little revenue", creating "high admin costs".

Instead, said the financial website, many economists argue that governments should "improve existing tax systems rather than introducing new wealth taxes".