Rachel Reeves needs to find cash fast. A wealth tax really is her only viable option

https://www.theguardian.com/commentisfree/2025/aug/22/rachel-reeves-labour-wealth-tax-budget

Version 1 of 2.

The alternatives for the UK chancellor are either unworkable or risk losing Labour votes, so here’s what she should try

Depending on whose forecasts you believe, in the autumn budget the UK chancellor needs to find £25-£50bn to cover day-to-day spending, let alone to raise the extra funds needed to turnaround crumbling public services or end the two-child benefit cap. Rachel Reeves is bound by a manifesto commitment not to raise the big three – income tax, national insurance or VAT – and having already slapped businesses with a national insurance rise in her inaugural budget last year, she faces having to think about creative ways to raise revenue.

The past few weeks, we have seen a bewildering parade of policies emerging from Treasury sources. These include reforms to inheritance tax, replacing stamp duty with a national proportional property tax for homes worth more than £500,000, replacing council tax with a local proportional property tax levied on house values up to £500,000 with a minimum annual bill of £800 paid by the property owner, and a potential capital gains tax (CGT) on primary residences valued at more than £1.5m.

The government is right that Britain’s property tax system is in desperate need of reform. The current council tax system is regressive and outdated, based on property values from 1991, and stamp duty is a punitive brake on mobility. However, the solutions being floated risk creating new problems while failing to solve the old ones.

Take the proposed mansion tax by another name: a CGT on primary homes worth more than £1.5m. In principle, it targets unearned wealth gains on the most valuable properties. But once you do the maths, its flaws become glaringly apparent. Unlike second homes or buy-to-lets, a primary residence has always been exempt from CGT. Introducing it would create a huge disincentive for people to sell. It would trap older homeowners in houses too large for them, stifling the property market for families below.

Other proposals the government is looking at, including a new tax on homes sold for more than £500,000, are thin on detail. (Although they are reportedly underpinned by a wider set of reforms in a paper from the thinktank Onward.) The tax would only kick in once you sell; it is not yet clear how this would differ substantially from stamp duty.

In this same set of proposals, a £500,000 threshold is also applied for those paying more towards a new property tax that would replace council tax. Such a threshold risks many ordinary people who own their properties in London and the south-east struggling to pay. For renters, this new property tax is paid by the owner. However, there is no modelling on probable ripple effects on rental prices. Making London even more unaffordable to live in will not help Reeves’s economic growth prospects in the short term.

Adding council tax bands for the most expensive homes is a potential short-term solution to help ease the inherent unfairness at the top, but it would not address regional price disparities. There are more progressive approaches to council tax, such as those set out by Fairer Share, which advocates for an annual flat-rate tax that would see the wealthiest pay more and any increase in local taxes capped to protect the “asset-rich cash-poor”.

Here is the crucial issue with the focus on property taxes: while most people hold their wealth primarily in their property, the richest do not. A 2020 study by the Resolution Foundation, using data from 2016 to 2018, found that on average in households with assets of £5m or more, property accounted for less than 20% of their total wealth. Instead, the wealth of the top 1% is dominated by stocks, shares, bonds and other financial investments. Financial wealth is significantly more prevalent in the wealthiest households and is a major driver of their rising net worth and inequality.

Inheritance tax does take forms of wealth beyond property into account, but here we come up against a significant political barrier. Understandably, people have an emotional connection with wanting to leave their homes to their kids, particularly amid a housing affordability crisis that has for many made it close to impossible to get on the property ladder without family support. Both the design and the communications of any reforms to this tax must focus on truly large dynastic wealth – by reforming the sorts of trusts that allowed the previous Duke of Westminster to pass on £9bn to his son without paying inheritance tax – rather than the modest wealth of ordinary families, otherwise it risks a huge political fallout.

This brings us back to a straightforward annual wealth tax. A modest levy of 2% on individual net wealth exceeding £10m. It is focused on inequality. It would raise substantial revenue; estimates suggest more than £24bn annually. And crucially, it applies to total net wealth (including assets such as stocks, bonds and property, minus debts). And no – well-designed wealth taxes in Europe have not caused the capital flight critics often prophesied, and dodgy data flouted in recent months has been found to be wildly exaggerated. The political argument is just as powerful. Polling consistently shows it is very popular, with 75% of the public backing a wealth tax, including Reform UK voters.

Of course, given that we don’t know the full value of what the richest have, there are administrative hurdles, but these are not insurmountable. The chancellor should announce more resources for HMRC to do the much-needed scoping work, and we can learn lessons from wealth taxes in comparable European countries.

People in the UK need to feel a real improvement to their quality of life. If they don’t, this government simply won’t last long enough to bring in any of the changesit is proposing. Instead of tinkering around the edges, with a wealth tax the government could win the argument on fairness – and finally start to reverse toxic wealth inequality in this country.

Faiza Shaheen is executive director of Tax Justice UK

Do you have an opinion on the issues raised in this article? If you would like to submit a response of up to 300 words by email to be considered for publication in our letters section, please click here.