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Tony Wickenden: Europe shows a wealth tax is hard to implement

Last week I looked in a little detail at the (apparently) Nick Clegg-inspired LibDem call for two fairly radical tax changes.

These proposals are:

• The introduction of a 0.5 per cent tax on the assets of the rich. The party’s policy document for the conference, Tackling Inequality at its Roots, states: “We welcome philanthropy and entrepreneurial activity that creates jobs but we also expect the wealthy to pay their fair share of tax. France and some American states have demonstrated that this is feasible by levying net asset taxes of up to 0.5 per cent per annum.”

• The replacement of inheritance tax with an “accessions tax” on beneficiaries of estates. A section on wealth taxes in a party consultation paper talks of “an accessions tax, where the tax liability would fall on the person receiving the income rather than the estate of the deceased. This would simplify the settling of the estate, making inheritance income more like employment and investment income”.

Calls for the rich to pay more is a trend that has been seen in other countries around Europe – notably France.

The economic case for higher taxes (especially income taxes) generating higher yields still has to be made – the jury is still out on the matter. The undoubted change in behaviour that higher tax rates encourages is beyond dispute.

Individuals targeted with higher taxes (on income, gains and wealth) are undoubtedly more open to taking action to avoid those higher taxes. Some will go as far as leaving the country to avoid higher taxes – this has apparently happened to some extent in relation to the higher remittance basis charge imposed on long-term UK resident non-domiciliaries.

And how successful have wealth taxes been in other parts of the world?

According to the Guardian, in France, it is estimated only 20,000 out of 20 million households pay their wealth tax, yielding only 0.04 per cent of total wealth in France – as ineffective for revenue raising as for redistribution.

Sweden used to have a form of wealth tax but they abolished it in 2011. It raised only SKr4.5bn (£427m) from 2.5 per cent of taxpayers but was estimated to have driven SKr1,500bn (£142bn) out of the country.

Fear of capital flight led Italian Prime Minister Mario Monti to abandon plans for his wealth tax despite the crisis that threatens his country. Both the Irish and Dutch governments cited capital flight as the principal reason for abolishing their wealth taxes as well.

The evidence is that wealth taxes also deter entrepreneurs. Analysis of four countries that abolished wealth taxes increased self-employment by up to 0.5 percentage points.

From the strength and speed of George Osborne’s reaction to Clegg /LibDem suggestion of an emergency wealth tax, how potentially affected individuals might react is likely to prove a hypothetical question.

In the meantime, it will be interesting to see whether the reduction in the additional rate of tax from 50 per cent to 45 per cent from 6 April 2013 will reduce the appetite for tax planning – the opposite of what supposedly happens when rates increase.

As to an accessions tax to replace inheritance tax, well, this has been unsuccessfully mooted before but (obviously) not implemented. An “accessions”-based tax on the transfer of wealth on death is, however, the basis used in other countries in Europe, including France, Germany and the Netherlands.

So what does all of this “tax publicity” mean to financial planners?

Well, the raising of awareness of taxation in the media represents an excellent platform on which to build campaigns and communications founded on “centre ground” non-contentious strategies for reducing the tax bills of clients through effective planning strategies – many of which could be founded on, or at least incorporate, financial products.

Inheritance tax and estate planning are subjects that lend themselves well to advice.

It is an area of planning that is likely to require adviser proactivity to get onto the planning agenda and is almost impossible to disintermediate. These two factors, plus its relative complexity, makes it an interesting area to consider as part of an adviser’s offering in a world where adviser charging is the basis of being remunerated.

Advisers have a wide range of proven, flexible and “officially acceptable” answers to use in devising bespoke solutions for their clients who wish to carry out estate planning but retain an element of control and access to the funds being used.

The role of protection plans in trust to meet the liability and leave the client’s “world” otherwise unchanged should also be seriously considered in the right circumstances.

Tony Wickenden is joint managing director of Technical Connection

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