How wealthy individuals should be taxed has become a hot topic in the run-up to the general election
Public debate around taxing the wealthy often focuses on “fairness” and whether the rich, especially foreign nationals taking advantage of the UK’s tax regime for non-domiciles, are paying their way.
While this regime is entirely legal and was designed to encourage investment into the UK, it is sometimes presented in the mainstream media as being decidedly unfair.
“The ‘res non-dom’ debate has become another pre-election football which is already damaging the UK’s claim it is open for business,” says Ashley Crossley, a partner and head of the wealth management department in London at international law firm Baker & McKenzie. “Clients are already deciding to wait for the election result before they commit to coming to the UK.
“These rules have been in place for generations and were designed by Parliament to attract wealthy people and business owners to live, work and spend here. It is not a loop-hole, but what Parliament wanted and politicians should be honest with the public about that.”
In addition, public concern has grown around tax avoidance, using legal methods to minimise tax liability. The distinction between this and tax evasion, illegally hiding money from tax authorities, is seen as becoming increasingly blurred by many professional advisers to the wealthy.
Against this backdrop, political parties are putting forward ways in which they would tax the rich to ensure they contribute a fair amount to public coffers.
“Ed Balls is ploughing on with his mansion tax proposal, which suggests he believes himself to be on very firm ground politically,” says Lucy Brennan, partner in the private wealth group at Saffery Champness. “This is despite its obvious bluntness and potential unfairness. Some expected the recent reform to stamp duty to steal his momentum by hitting the wealthy hardest, but he is undeterred.
“The Labour Party plan to reintroduce the 50p top rate of income tax. With 2 per cent National Insurance contribution on top for employees and the self-employed, workers would be paying a total of 52 per cent over to the taxman.
“The last time this happened in 2010, we saw some higher earners being able to defer income until it was cut again in 2013, a measure of how uncomfortable people are working for a return of under 50 per cent. However, if they face a five-year wait or longer for their income, some may resign themselves to paying the tax.”
Already the government has taken action which some professionals regard as a possible precursor to tougher action post-election.
Whatever legislation is put in place, it should lean towards encouraging rather than discouraging investment
“Recently, we have seen two public tax rises: the rise in remittance fees for non-doms and increasing thresholds for stamp duty on properties above £2 million,” Iain Tait, partner and head of the private investment office at London & Capital, points out. “This may be just the start of it if we see a Labour government in May.
“Labour has promised a mansion tax and a levy on bankers’ bonuses. Ed Miliband also wants to dispossess property speculators who ‘hoard’ land, to control energy prices and to raise the top rate of income tax to 50 per cent, after it was lowered by David Cameron to 45 per cent.
“We’ll see whether further regulation will have an impact on investor sentiment and if the recent increase in stamp duty has affected whether investors buy or sell properties, slowing the housing market as a result.
“I think whatever legislation is put in place, it should lean towards encouraging rather than discouraging investment. We must ensure we do not cut off our nose to spite our face.”
While accepting that the majority of the wealthy want to, and should, contribute fairly to society, this concern that if politicians go “too far” in their proposals it could have a detrimental effect on the UK, is shared by others.
“The UK government’s adoption of aggressive tactics to collect taxes may in the short term assist in raising some extra revenue, but it is rather shortsighted as it is seen by many to erode the attractiveness of the UK to the internationally mobile community who, both directly and indirectly, contribute an enormous amount to GDP,” says Nick Warr, head of the private wealth group at international law firm Taylor Wessing.
“One of the main attractions of the UK for international high-net-worth individuals has been the perception of certainty and fairness, although the constant changing of the fiscal rules, combined with the potential negative publicity, is beginning to make some people think twice before moving here. This could be extremely damaging in the long term.”
Liz Field, chief executive of trade body the Wealth Management Association, says she hopes any prospective government will refrain from knee-jerk reactions to popular opinion. Instead she would want the next government to look at increasing financial education and helping all savers. “Wealth is a relative term,” she says. “We’d all like to be better off tomorrow than we are today.”