Treasury Committee - Tax experts warn against a wealth tax

The session on 14 October covered a broad range of tax-related topics, including the potential introduction of a wealth tax, National Insurance, changes to Inheritance Tax (IHT), capital gains tax, property taxation, the effectiveness and evaluation of tax reliefs, and tax reforms. Below we have summarised some of the key points. For a detailed account of all issues discussed during the session, please download the full transcript.

Tax reform vs. tax rises

Dame Meg Hillier, Chair of the committee, began the session by highlighting that the Chancellor faces a fiscal gap of £20–£40 billion ahead of the Autumn Budget. She asked what would be the panel's top priority if they were in Rachel Reeves’s position.

Helen Miller, Director of the Institute for Fiscal Studies, emphasised the opportunity to reform taxes so they do less economic damage, not just raising revenue. She suggested focusing on the economics, not just the politics, of tax rises, arguing that tax rises are not all “born equal”, some are more damaging than others. Miller stated, “You could scrape £20 or £30 billion without touching those [big] taxes. The question is not ‘could you’?; I think it is ‘should you?’”

Dan Neidle, Founder of Tax Policy Associates, warned the Chancellor against picking from a “scrabble bag” of little individual tax rises that could add complexity to the tax system. “Every time you create 10 more tiny tax rises and tax changes, you add to that layer, which has ossified our tax system, so I very much hope she does not do that”. He advocated for pro-growth tax reform, especially simplification of corporation tax and reducing the VAT threshold.

He suggested the Chancellor could take a new approach to simplification: “Instead of an essentially technical body, like the Office of Tax Simplification, which produced extremely worthy and excellent reports, most of which were never implemented, you need a political commitment to simplification — a small body of smart people with a junior minister responsible, whose job is to identify areas of the tax code where you can eliminate a whole series of rules and legislation without any fiscal consequence. I believe there are many like that.”

Ruth Curtice, CEO of the Resolution Foundation, urged Reeves to ‘carefully’ think about the winners and losers of any tax rises, outlining the think tank's proposals for reducing employee national insurance while increasing income tax, changes to capital gains tax, and introducing a tax on the salt and sugar content of processed food.

Professor Arun Advani, Director of CenTax, said that the way to get growth from the tax system is not trying to “pick off individual bits of legislation that you can carve away and work out which exact rule you can remove; it is about changing the structure of the tax system so that we do not need those rules”. Advani suggested that to encourage growth, the government could look into equalising tax treatment of different forms of investment (property vs. shares) and address high marginal tax rates at income thresholds.

John Grady MP (Lab) said, “The message I am taking from all four of you is that, actually, we need to step back and undertake fundamental reform of the tax system and we need to stop ducking that fundamental reform”. He asked if he had misunderstood any of the experts. Miller said she had been “banging on” about fundamental reform for two decades, adding that reform is not as ‘scary’ as some might fear. Curtice also agreed with the need for reform but emphasised the immediate challenge that the UK faces: a £20 - £30 billion fiscal shortfall.

Tax reliefs

Yuan Yang (Lab) observed that the UK has over 100 non-structural tax reliefs, costing as much as the NHS budget, asking the panel: “How have we come up with so many tax reliefs”.

Advani highlighted that HMRC spends very little on evaluating reliefs, about £600,000 a year for £200 billion worth of reliefs. Miller added that for some reliefs, the original policy intent is unclear or changed over time, “because someone has layered the most recent thing that they thought they were doing with that. You are trying to evaluate an ever-moving target, in some sense”.

Neidle believed that the apparent cost of some relief “bears no relation to the amount that you would raise by ending it”. He provided an example of one of the largest relief - capital gains relief for principal residence - saying “no country in the world taxes capital gains on main residences full stop, because you can’t. You couldn’t have someone living in a £300,000 home that is gone up over the last 30 years and wants to buy another £300,000 home, but now they face a bill of £80,000. No system can work like that.”

The Chair asked whether there is an argument for changing tax relief on pensions and equalising it at a 30% rate, to which Miller responded that stability in pension tax relief is vital due to the long-run nature of pension decisions. She cautioned against frequent changes and speculation, as these can influence behaviour. She believed that the government should clearly outline its approach and “then just leave it alone”, adding: “The debate often moves towards the income tax relief for the upfront income—that is not a relief, in my mind. I think you can make credible, reasonable, rational arguments about whether you tax pensions on the way in or the way out, but you should not be taxing them at both ends”.

Agreeing with Miller, Neidle said that the frequent proposals to limit tax relief on the way in are not ‘viable’, because it is very hard to apply them to defined-benefit pensions. He continued that implementing a system which exempts defined-benefit plans while increasing taxation on defined-contribution pensions would result in unfairness.

Wealth tax

Asked about the Wealth Tax Commission’s view that current wealth taxes in the UK should be fixed, Advani replied that these taxes “do not work particularly well”. He recommended ‘fixing’ existing wealth taxes before considering a new wealth tax, arguing for equalising capital gains tax rates with income tax rates, but with an investment allowance, so only returns above a “normal” rate are taxed. Neidle strongly supported this proposal.

Miller argued that the current system for taxing returns on capital, such as capital gains and dividends, has two main issues: a clear rate difference with capital income usually taxed at a lower rate than other income and more complex problems related to the tax base itself. She suggested that the solution lies in fixing the tax base—such as not taxing inflationary gains—rather than just focusing on rate changes.

John Glen (Con) raised concerns about the potential negative impact of equalising capital gains tax rates with income tax rates. He highlighted the risk that such changes might discourage investment, particularly in sectors like technology, making the UK less attractive for entrepreneurs and investors. He questioned whether the move could have a “chilling” effect on people’s willingness to put capital at risk.

Advani explained that, under the proposed changes, investors would receive an investment allowance a bit more generous than (former Chancellor) Nigel Lawson’s indexation allowance. He continued: “It would be to say that if you put actual money at risk, you are not going to pay tax on a certain level of return on that, and only if you happen to do well enough to make a return above that will there be any tax at all. In that case, if you are doing better than that, certainly the tax rate is higher than the current one”.

Advani said that the revenue-maximising point for capital gains tax is dependent on the tax system’s design. He explained that introducing a ‘settling-up’ charge—similar to exit taxes in other G7 countries—would mean individuals leaving the UK pay capital gains tax on gains accrued while resident. This would only tax gains made during UK residency and not those accrued before arrival, with the charge payable over time rather than immediately upon departure.

Neidle emphasised the wealth tax disincentive effect on investment, saying that “a wealth tax is no answer to the current fiscal issues”. He challenged the credibility of “one-off” wealth taxes, arguing that “if you really were able to raise a very large amount of money with a one-off tax and you create the infrastructure to do it, the temptation to press that button again is going to be irresistible”. He further explained the dilemma of taxing wealthy foreign investors in the UK, saying exempting them from a wealth tax would disadvantage British-owned businesses, but taxing them could deter foreign investment, making the UK less attractive compared to other countries.

Curtice believed that a one-off wealth tax would only temporarily reduce debt without addressing the UK's structural deficit. She emphasised that raising substantial revenue requires considering who owns most wealth and “what it is made up of” (e.g. property and pensions).

Grady raised the issue that both wealth and money are ‘mobile’, highlighting the challenge for the UK to tax wealth effectively without international cooperation. He questioned whether pursuing tax cooperation with other countries is necessary.

Neidle responded that while some, including Zucman, advocate for an internationally coordinated wealth tax targeting billionaires, the largest economies with the most billionaires—namely the US, China and India—oppose such measures. Advani added that improving HMRC’s access to information is crucial not just for wealth taxes but for ensuring current tax rules are being operationalised effectively, while emphasising the value of third-party information.

Yang intervened, referencing the Public Accounts Committee’s findings that HMRC does not know how many billionaires pay tax currently in the UK. Advani replied that HMRC interprets the Taxes Management Act 1970 as saying “it should collect the information it needs to operationalise the current tax system”. He thought it was reasonable for HMRC to gather more than just basic information to improve the system.

Non-doms

The committee probed whether the changes to the non-dom tax rules had led to people leaving the country. Neidle was confident they had but was dismissive of some of the figures which had been published.

Dame Harriett Baldwin (Con) asked if there were any aspects of the changes which, if reconsidered, “would stop something that is as yet unquantified but seems to be a reduction in potential future tax revenues accruing to the UK economy”.

Advani pointed to the inheritance tax rules set by Jeremy Hunt and maintained by Rachel Reeves, explaining, “if you are in the UK for nine years and 364 days, and you get hit by a bus—no inheritance tax. One day over that and suddenly you are paying 40% on your worldwide assets”. He described the change as ‘dramatic’.

Neidle added, “I might go further, because another strange feature of the way they introduced the new rules is that they kept the awful complexity and distortion of the old rules for your previous money, so when you move into the new regime, and with all the money you kept offshore… you are still taxed on it if you bring it into the UK”. He suggested that a better approach would have been either a one-off amnesty or a mandatory repatriation tax, similar to the US model, to incentivise individuals to return their money to the UK.

Advani pointed out that the UK does have a repatriation tax: “it is just that it is not mandatory. You can choose to keep your stuff offshore. The Chartered Institute of Taxation has recommended that there should be what it calls a long stop so that if, after a certain period of time, you have not brought it onshore, there is some point at which we just deem it to be brought onshore, and it is all taxed. That would be something that could be looked at, and it would obviously raise money on the bit that people do not choose to bring onshore.”

Inheritance tax

Bobby Dean (Lib Dem) discussed the Budget speculation about changes to the IHT exemption amount, introducing a lifetime cap and extending the seven-year period to ten years. He questioned what behavioural effects these changes might have.

Neidle described IHT as “a very strange tax”, arguing that most people never pay it. He reported that the tax affects the mass affluent a lot more, and the UK’s rate in practice is “the highest in the world”. In regard to lifetime wealth accumulation, Advani believed that extending the seven year period for gifts to ten years would not result in a significant change to the gifting behaviour of the wealthy.

On changes to agricultural and business property reliefs and whether the government should revisit the changes, Miller said that there is a “very strong case” to apply IHT equally to all assets. She suggested that allowing reliefs like exemptions for ‘farmland’ encourages tax avoidance and is unfair, adding, “if I pass on a house, a farm, or any other asset, why am I treated differently by inheritance tax depending on how I chose to hold my assets? On that basis alone there is a reason to get rid of these reliefs”.

She added that if you want to support farming it made more sense to do it directly rather than to say: “If you want to pass your farm to a family member we support you, but if you’re a new farmer or you do not want to pass on your farm, you get no support.” 

Neidle said he agreed with Miller in theory but not in practice. Many small farms are “fundamentally barely economic, or not economic”. The effect of the change will be the “break-up of a material number of small farms”, he thought. “My fear is that the changes went too far and also not far enough: too far in over-taxing small farms, but not far enough because they still give 50% relief to pure tax planning inheritance tax investment”.

Advani put forward a Centax proposal to address the issues: “you could instead have a minimum share rule, saying that if less than 60% of your estate is agriculture and business property, including the farmhouse, you are at no risk of break-up because you can always use the parts of your estate to pay for this”.

Neidle endorsed the CenTax proposal, saying: “For me, that is the solution. It also raises an additional £500 million, so it raises more tax, too.” Miller was more cautious, saying it depends on what the government wants to do. Advani’s proposal would protect family farms if that is your objective, she said, but that is a policy choice.

Baldwin suggested it was unfair that people facing inheritance tax generally had been able to take advantage of the seven-year rule, but because farmers were exempt, “there are farmers who are now well into their 70s and 80s who have not done it”. Miller indicated that it would be easy to remedy that by giving current older farmers “the same tax avoidance opportunities that they would have had if they were not to die within the next seven years”.

Property taxes

The panel all agreed that stamp duty land tax should be abolished as part of a comprehensive property tax reform.

Miller also emphasised that council tax reform is needed, saying you should —make it proportional and update property values to replace the current council tax and SDLT. While acknowledging that valuation is challenging, she believed that revaluing property stock is feasible: “We put a person on the moon; of course we can revalue property.”

Regarding council tax reform, Curtice highlighted the challenge involved with transitioning between systems and questioned “whether you can marry the politics of how quickly you charge people the new council tax”. Advani added that council tax operates at a local level, and any reform would require a lot of redistribution among local areas. He observed that “a lot of stamp duty is a lot of revenue for the Exchequer, which will not be made up unless you have something that layers on top of council tax to make sure that some of it comes back.”

National Insurance

Yang asked about the Resolution Foundation proposal of shifting from national insurance to income tax aiming to create a more level playing field between different types of income, and about its potential effects on economic growth.

Curtice explained that, currently, employment is taxed more than other forms of income (such as self-employment) and more than rental income and pensions, among others. She said that a rise in the income tax rate and a cut in the national insurance rate would “reduce the extra taxation on work”. Given that one of the ambitions of the government is to increase employment rates, improving incentives to work “is a good place to look”, and “we would get some labour supply benefit from cutting employee national insurance”.

Miller said that raising taxes on capital income or an increase in national insurance would put up tax rates for landlords and self-employed people. This would create trade offs: “You have more alignment across different incomes, but you are going to disincentivise investment”. She said the system already has “a humungous tax bias in favour of owner-occupiers against landlords. For example, we cap their mortgage interest relief, we have higher stamp duty, and so on”. One result is fewer rental properties available and they have higher rents.

On national insurance for pensioners who are working and of retirement age, Curtice said there is quite a lot of evidence that people become more sensitive to tax rates as they age. She cautioned against changing NI rules, given that boosting labour supply seems to be important.