The Institute for Fiscal Studies (IFS) has warned the government against introducing an annual wealth tax in the upcoming Budget in November.

It said that the introduction of an annual wealth tax would face huge practical challenges, penalise saving, and incentivise wealthy people to leave, or not come to, the UK.

Furthermore, the institute argued that an annual wealth tax would not be a well-targeted way to tax the large returns that wealth can generate, and would therefore not be a good substitute for well-functioning taxes on capital income and gains.

“If the Chancellor wants to raise more from the better-off, a better approach would be to fix existing wealth-related taxes,” the IFS stated.

The IFS noted that while a wealth tax may seem desirable in principle, the practical issues involved in designing and implementing a tax on wealth stocks should not be underestimated.

This is because it would require the government to value wealth each year, which would be a “huge undertaking”, and it would be “extremely difficult” to value certain kinds of assets.

Additionally, the organisation highlighted that the international experience of annual wealth taxes had not been encouraging, and had been abandoned in most developed countries that previously had them in place.

The IFS’s view is that the government’s priority should be on fixing current taxes, such as capital gains tax and inheritance tax.

While the institute warned against a recurring wealth tax, it argued that a tax based on an “unexpected and credibly one-off assessment of existing wealth” could, in principle, be an economically efficient way to raise revenue, as tax liabilities based only on past wealth could not be reduced by changing future behaviour.

“The potential efficiency of such a tax could be undermined, however, if announcing a one-off tax created expectations of, or uncertainty about, other future taxes which led people to change their behaviour – though other tax rises can also affect expectations and uncertainty,” the IFS said.

“Whether such a tax is considered fair is something on which reasonable people will differ.”

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