A new analysis suggests any wealth tax introduced by the government could seriously backfire.

Wealth management firm Rathbones says more than £100 billion of wealth could shift overseas, or into less productive assets, if a wealth tax were imposed in the UK, as the government seeks to plug a so-called black hole in public funding.

Further, a wealth tax could cost the government £600m to set up, with ongoing compliance and administrative costs on taxpayers of £700m a year or more. Rathbones says administrative costs are a key reason why so many countries have abandoned wealth taxes, and why the Labour government of the 1970s which promised a wealth tax never delivered it.

“There is clear evidence that a recurring wealth tax would be economically damaging to the UK” says Oliver Jones head of asset allocation at the firm.

“Such a tax would require annual valuations of complex and illiquid assets – including private businesses, art, and intellectual property – for thousands of individuals. This process would be costly to administer, difficult to enforce, and could create significant economic distortions.”

A wealth tax may also encourage people to relocate or shift their holdings into assets treated more favourably – or exempt – from the tax. Rathbones estimates that a least £100 billion in assets could move abroad or into less productive forms if a wealth tax is imposed – based on analysis of official UK economic data and a study on the impact of wealth taxes.

Analysing wealth taxes in the three high-income countries where they are currently implemented (Spain, Norway, and Switzerland) economists at Rathbones conclude that international experience offers little encouragement.

Since the 1990s, the number of rich countries levying wealth taxes has fallen by three-quarters, from twelve to just three. Spain and Norway raise comparatively little revenue through their limited wealth taxes, far less than UK advocates anticipate. Only Switzerland raises significant revenue from wealth taxation, but its entire tax system is structured differently, with minimal taxes on income, dividends, and inheritance.

After France announced in 2017 that it would replace its wealth tax with a property tax, the number of eligible taxpayers leaving the country fell to its lowest annual rate since 2005. And the number of wealthy taxpayers returning to France increased, rising to nearly 250 in 2018 from around 100 before the reform.

With a fiscal shortfall estimated between £20–£50 billion, the Chancellor could explore property-based taxation as a more viable alternative, according to Rathbones researchers. 

Proposals reportedly under consideration include further reform of council tax to better reflect current property values: National Insurance on rental income and / or Replacing stamp duty with an annual property levy.

Oliver Jones says: “Alternatives to a wealth tax might include further changes to inheritance tax, following the reduction of various exemptions in the 2024 Budget. That would be cheaper and less damaging to implement. However, raising inheritance tax rates could be very challenging politically, given the evidence that it is an especially unpopular tax.”