Footing The Covid-19 Bill: Is A UK Wealth Tax Something To Be Afraid Of?

• Published date: 08 July 2020
• Subject Matter: Wealth Management, Real Estate and Construction, Tax, Coronavirus (COVID-19), Wealth & Asset Management, Real Estate, Income Tax, Capital Gains Tax, Property Taxes, Government Measures, Operational Impacts and Strategy
• Law Firm: Withers LLP
• Author: Mr Michael Rutili and Hannah Herbert

As lockdown restrictions ease, countries across the world are grappling with how to safely restart their economies after such a sudden halt. Despite the inevitable risks and uncertainties that come with reopening society and getting people back to work, governments are keen to avoid the economic fall-out becoming any greater. It will be a long time before the total cost of Covid-19 to the UK economy will be known but, to take just one figure, the Office for Budget Responsibility has estimated that total government borrowing could rise to just under '300 billion for 2020/21 (for context, total government revenue in 2018/19 was roughly '630 billion).

Across Europe, the worst affected countries are wondering how to start repaying what amount to some of the highest levels of borrowing in peacetime. Some governments, such as that in France, appear to be hoping that the debt will become more manageable once the economy starts back up again (as a result of strong growth and continued low interest rates). Nevertheless, the governor of the Bank of France has already warned that there could be significant cuts on public spending as soon as the economy starts getting back on its feet. Spain has thrown its weight behind the proposal for a European recovery fund that would both invest in public projects and buy up the public debt of those countries facing difficulty. Italy is working towards an emergency budget.

Instinctively, governments are looking at the lessons from the global financial crisis a decade ago (the magnitude of which many fear will pale in comparison to the current crisis). During that period, both France and Italy leaned heavily on raising taxes to plug the hole in public finances. In the UK, by contrast, the majority of measures were directed at cutting spending (around 80% of the UK's fiscal measures were spending cuts rather than tax rises, in contrast to 33% in France). That said, another round of austerity would be politically costly to the UK government and it seems more likely than not that an increase in taxation, together with a number of other stimulus measures which may include injecting new liquidity in the economy (so called 'quantitative easing'), will be the result instead.

Increasing taxes is never easy and governments know that it rarely wins them votes. Changes to Income Tax or National Insurance contributions are an incredibly difficult balancing act and an increase in VAT (Value Added Tax) would be easily perceived as an...