An annual wealth tax would be a “poor substitute” for properly taxing the sources and uses of wealth, according to the Institute for Fiscal Studies (IFS).

IFS senior economist, Stuart Adam, said there were strong reasons to radically change how the UK taxes the sources and uses of wealth, including reforms to capital income taxes to 'properly' tax high returns.

However, he stated that it was difficult to make the case than an annual tax on wealth would be a sensible part of the tax system, as it would penalise saving and investment.

Rumours have emerged that the government would consider an annual wealth tax, after former Labour leader, Neil Kinnock, called for its introduction, and the government declined to rule it out.

Prime Minister, Sir Keir Starmer, was asked about the potential wealth tax at Prime Minister's Questions yesterday (9 July) and did not rule it out, but did later say "we can't just tax our way to growth".

Adam warned that implementing such a levy would be difficult, requiring the government to set up a new administrative apparatus to value wealth.

“Valuation would be extremely difficult for some assets, such as private businesses: it is much easier to observe and tax the stream of income they generate,” he continued.

“An annual wealth tax would need to apply broadly to all assets to ensure that it was not easy to avoid.

“Such a tax could raise significant revenue if it applied to the bulk of the UK’s wealth – that would include the homes and pensions of the middle class.

“Trying to raise large amounts of revenue from only the very wealthy would make the UK a less attractive place for those people to live.”

Furthermore, Adam noted that the international experience of annual wealth taxes had not been positive and had been abandoned in most developed countries that previously had them.

“There are strong reasons to radically reform how we currently tax the sources and uses of wealth; this includes reforming capital income taxes in order to properly tax high returns,” Adam said.

“An annual wealth tax would be a poor substitute for doing that.”

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