Won’t wealth taxes hurt asset-rich-but-cash-poor farmers, retirees, and business owners?

It is important that the design of wealth and inheritance taxes take into account the circumstances of those who grow our food, those who have worked and saved over the course of a lifetime to fund their retirement, or small and medium sized businesses that power our economy.

Concerns about the impact on farmers, retirees and business owners would be largely addressed by the fact that primary residences or family homes are typically excluded from wealth and capital gains taxes. Other exemptions or deferrals can be built in the wealth taxes to address these concerns.

It is important to note also that farmers, retirees and small business owners would all reap benefits from our proposed tax reforms, in the form of increased government investment in infrastructure, climate adaptation, research and development and services including the restoration of our public health system, and rural health.

A common concern we hear is that, because the value of family farms can be substantial, but the incomes they provide modest, farming families may not have the ability to pay wealth and inheritance taxes without selling their farms. In addition, retirees who own valuable property but have relatively low incomes may face hardship as a result of wealth taxes. Moreover, small and medium-sized business owners who draw little profit or income from their businesses may face difficulties in meeting wealth tax obligations.

The UK Wealth Tax Commission found that liquidity constraints are a real concern though not as widespread as often thought—the proportion of wealth holders who would face the need to sell an illiquid asset like a farm or business to meet wealth tax obligations is low. Those with significant illiquid assets may be able to borrow against their assets to meet their tax obligations—but this should not be seen as a solution to liquidity constraints in and of itself.

In addition with regard to inheritance taxes, spouses would, in our proposal, be exempt from a wealth transfer (inheritance or gift) tax, and children would be able to inherit a higher amount, before the tax is applied, than other relatives and non-relatives. For example, Ireland’s capital acquisitions tax (CAT) has a €400,000 exemption threshold for children. Applying a similar threshold in Aotearoa New Zealand would encourage assets to be broken up and split between family members following the death of a wealth holder, which is critical for mitigating the concentration of wealth and increasing inequality across generations.

There will be specific factors that need to be taken into account regarding Māori collectively owned assets, which cannot be split up or sold. These should be exempt from a wealth transfer tax though many are likely to be below the threshold for an individual household in any case.

There may still be exceptions, whereby people could face hardship when wealth or wealth transfer taxes are due. This can also be mitigated through design. Our proposed wealth and wealth transfer taxes target large wealth holdings or transfers. By applying a high threshold before the taxes kick in, we can ensure they are primarily targeted at the ultra-wealthy. Further, liquidity concerns can be mitigated by stretching the payment periods for wealth and inheritance taxes over multiple years, without incurring additional fees or interest. Finally, for the small minority who would still face genuine hardship or the need to sell illiquid assets in order to pay, government could institute a deferral scheme, to allow these taxpayers to defer their liability until the asset is sold or passed on after death.