Could a ‘Mansion Tax’ and private jet levy be the start of a real Scottish wealth tax?

The Scottish Government's 'mansion tax' has taken a step forward | Jane Barlow/PA Wire

Earlier this month MSPs backed the Scottish Government’s “fair, progressive and sustainable” approach to tax following a debate at Holyrood. Current plans include two new council tax bands on the most expensive properties by April 2028, while ministers have also pledged to introduce a private jet tax.

The Government motion welcomed “progress made towards the creation of a private jet tax and a mansion tax”. And deputy First Minister and Finance Secretary Jenny Gilruth said ministers were “asking those with the broadest shoulders to contribute more while protecting the majority of people”.

Despite this there are concerns the proposals will not just hit the most well-off, while concerns have been raised that the benefits of these taxes will not go far enough and that a wider wealth tax - targeting a person’s net worth rather than specific assets - is needed.

So what is a wealth tax? How could it work? And are we going to see one in Scotland any time soon?

“When people talk about a wealth tax that can mean a lot of different things,” Katie Close CA, Director of Tax at the ICAS, said.

“There are already a number of taxes in Scotland today that are directly linked to a person’s financial success, including inheritance tax, capital gains tax, income tax and property tax.

“The mansion tax is a property tax, and it is something the Scottish Government are pursuing because they already have the power to do so.”

It’s not clear yet how much more owners of these homes are going to pay under plans for two new council tax bands - for properties worth between £1m and £2m, and those worth over £2m. Before that can happen there needs to be a “targeted revaluation” of the most expensive Scottish homes, which itself is expected to cost £5m.

While the details have still to be figured out, early estimates suggest the proposed ‘mansion tax’ could earn around £14m annually for the economy. Scotland’s public spending deficit is estimated to be around £26.2 billion.

“A bigger question as well is when you look at administering a new tax you have to look at the cost of implementing that, which then affects how much revenue the tax brings in,” said Katie.

“All the work so far suggests this would affect a very small amount of homes, and would not generate a huge amount of revenue for the government. It’s certainly not going to put a dent in the budget deficit.”

So could Scotland look to bring in a tax on actual wealth - rather than taxing the trappings of wealth - to try and balance its books? And, more importantly, could it work?

At one stage such taxes were quite common in Europe but most have been scrapped purely because they were not effective at increasing the tax revenue raised. Today there are only four countries that levy a wealth tax - and arguably only one that does so successfully.

Columbia, Switzerland, Norway and Spain all have a wealth tax, and the Swiss model is generally considered to be the most effective. There they target a person’s worldwide net assets and tax them at a variable rate of less than 1%.

“There are only four OECD nations that still have a net wealth tax, and the fact that there’s only four still left doing it tells you something about how effective they are,” Katie said..

“In Europe it has dramatically declined. In 1990 there were many more countries that had a net wealth tax like those in Switzerland and Norway, and they have gotten rid of them.

“There are a few reasons why it’s in decline - and one of the biggest is that it's really hard to administer. You’re looking at what people own, so you have to identify those assets and then you have to value them. Valuation is really difficult. It relies on an immense amount of data, and you need reliable valuations.

“Then once you’ve got all that you actually have to administer the tax and collect the tax.

“Switzerland is most successful, but that’s because they have a very high population of wealthy individuals, and the tax fits in with their other taxation and their population. Here you would need to ask the same questions of how it would fit in. We already have inheritance tax and capital gains tax, so people are already being taxed on their wealth.

“Economists talk about the tolerance people have for paying taxes - there is an optimum level of taxation that people are happy to pay, and after that point support drops down and tax revenue actually decreases.

“It is different in every place as it depends on the circumstances of the country, but it brings up interesting points about how happy people are to pay tax.”

Another major stumbling block to a ‘net asset’-based wealth tax in Scotland, is the fact that currently the Scottish Parliament does not have the power to do it.

“The Scottish Government is putting forward measures which are more a tax on wealth - the mansion tax, additional council tax bands, the private jet supplement that comes in with a departure tax - these are specific assets they are looking to tax,” says Katie.

“Currently they do not have the power to tax a person’s actual wealth. They wouldn’t be able to follow the Norway model for example, as they can’t tax assets outside property, so they would have to ask for permission from the UK Government for something like that.

“There has been little appetite for a wealth tax at the UK government level, so any such request is likely to be rejected, although that obviously depends on who is in control of Westminster.”

In her opening remarks to MSPs, the Finance Secretary alluded to this, pointing out that the country was “reaching the limit of what we can do with our devolved powers” and suggesting ‘meaningful’ reform of wealth taxes would require ‘significant’ cooperation from the UK Government - while confirming that ministers would initiate plans for a “broad, evidence-based conversation’ on how Scotland can tax wealth more effectively.”

The Scottish Greens have also pledged to develop a Scottish Wealth Tax, with green MSP Gillian Mackay saying earlier this year: “Scotland is not poor. The problem is that far too much of our wealth has been hoarded by the likes of billionaires, landowners, oil barons, property empires, media dynasties and bus bosses.

“By developing a Scottish Wealth Tax, we would make landowners, polluters, profiteers and billionaires pay their fair share, then use that money for the common good.”

That idea gets to the main issue at play in all this - getting those with the most money to contribute more.

The Scottish Fiscal Commission says recently agreed income tax changes - and income tax is a tax on your wealth - will generate an extra £72m in 2027-28 and about £200m from 2028-29.

These increases will have the biggest impact on anyone earning over £43,663 a year, who will be paying 42%, rising to 45% for those earning over £75,000 and 48% for those earning over £125,140.

Those are very healthy salaries for sure, and vastly above the average annual Scottish salary of £33,061 - but they are still not exactly the target market of “millionaires and profiteers".

So how do you get those with the most money to pay more?

“These are the kind of debates on wealth tax going on at the G20, the OECD and the UN, about targeting ultra-high net worth individuals, who in a lot of cases pay as a percentage a lot less tax than ordinary people because they have the means to arrange their affairs in a way that is conducive to that” says Katie.

“They have the money and means to do that, something that isn’t available to ordinary individuals.

“In addition they are extremely mobile - they can leave a country at any time, and may have multiple homes around the world.”

“The Wealth Tax commission put together a 2020 report on whether the UK could have a wealth tax - their conclusion was it would be better to have a one-off tax, rather than annual, as if it was one-of you would mitigate those behavioural responses, with people less likely to leave or change tax affairs to try and avoid it.

“If you have a recurring tax you have time to set it up and you need people to pay it year on year, and that gives people the chance to change their behaviour or change their tax affairs, and so you end up raising a lot less tax than anticipated.

“The Wealth tax commission report suggested a one-off levy shouldn’t have any lead in time to prevent this.

“It’s something that is perfectly possible but whether it would be popular is another issue.”