How Would Debt Be Treated?

The objection arrives as a recipe. A wealth tax falls on net wealth. Net means debts come off. So a person who owns a great deal borrows against what they own, keeps every asset, and hands the tax authority a balance sheet with a much smaller figure at the bottom. Nothing has been sold. The lender holds a charge and the base has shrunk. Anyone who has watched a mortgage sit against a house knows the shape of it.

Net means what the statute says it means

The objection has the arithmetic right. Income is a flow, measured over a period. Wealth is a stock: the assets a person owns at a point in time, less the liabilities owed at the same point. The Office for National Statistics measures household total wealth as four components, net financial wealth, private pension wealth, physical wealth and net property wealth, and it subtracts debt inside the component the debt belongs to. A mortgage reduces net property wealth. A personal loan reduces net financial wealth. The subtraction is written into the definition.

The OECD describes the tax the same way. Its 2018 study of net wealth taxes across member countries defines them as recurrent taxes on individual net wealth stocks, levied on a wide range of movable and immovable property net of debt, and among the things that separate them from recurrent taxes on immovable property is that debts are deductible. The same report's overall conclusion cuts the other way. Where a country already has broad-based taxes on capital income and well-designed inheritance and gift taxes, the arguments for adding a net wealth tax are limited: the report finds that net wealth taxes tend to be more distortive and less equitable, largely because they are imposed irrespective of the actual returns that taxpayers earn on their assets. The UK has both, and the OECD's caution is addressed to countries in that position.

The reference model this series argues for is a proposal, which Parliament has not enacted: an annual charge on individual net wealth above £10 million, valued at open market value on 5 April each year. Individual, so each person's debts are set against that person's assets. Net, so the borrower in the opening paragraph is describing a real feature of the design. What the word liabilities is allowed to include is decided by the statute, not by the borrower.

Four kinds of debt

Borrowing changes a balance sheet. Whether it changes a tax base depends on which liabilities the law allows, and the regimes that tax a net base have had to answer that in writing. The debts a sceptic has in mind fall into four kinds. Money that is, in some disguise, owed to yourself. Money left owing because owing it is cheaper than paying it. Money borrowed to buy something the tax does not reach. And money borrowed to pay the tax itself, which is a different case.

Spain runs an annual net wealth tax, so it is the closer comparison. Article 25 of Ley 19/1991 values debts at their nominal amount on the date the tax is charged and allows them only where they are properly evidenced. It then refuses any deduction for debt taken on to acquire an exempt asset, and where an exemption is partial it allows the proportional part of the debt and no more. The exemption for qualifying family businesses in the same law works on the same principle from the other side: it applies pro rata to the assets necessary for the business, net of the debts that relate to them, and passive assets held inside the company stay in the base. A Spanish taxpayer cannot borrow to buy an exempt holding and then set the loan against everything else. The text of article 25 read for this piece is the consolidated version last amended in 2000.

There is no annual wealth tax in the UK. Inheritance Tax, charged on an estate at death, already restricts which debts reduce the base. Three provisions do the work. Finance Act 1986 s.103 abates a debt to the extent that the money lent came from property derived from the deceased, so a debt funded out of your own estate does not reduce your estate. Inheritance Tax Act 1984 s.175A, inserted in 2013, counts a liability left undischarged after death only where there is a real commercial reason for not paying it and securing a tax advantage is not one of the main purposes; a real commercial reason exists where the creditor deals at arm's length, or where an arm's-length creditor would not have required payment. Section 162A of the same Act, inserted by the same Schedule, attributes a liability to the excluded property it financed and takes it into account only so far as the section permits, and s.162B applies the same matching to relievable property, including business and agricultural property.

These are Inheritance Tax provisions, and what they establish is narrow: UK statute already defines a deductible liability for one tax on a net base, and already disallows the self-financed debt, the debt kept alive for the tax saving and the debt matched to an asset outside the charge. The arm's-length test is narrower than it sounds: it bites on a liability left unpaid after death, and this article does not stretch it into a general rule against borrowing from connected people.

Where the objection is right

The statutes describe restrictions. How well they hold is a separate question. Nothing cited here says how much borrowing these rules prevent or what they cost to enforce.

Then there is the fourth debt on the list, money borrowed to pay the tax, which the anti-avoidance provisions leave alone. A net base that refused every liability would fall hardest on the owner whose wealth is a business and whose cash is not, and every country that runs the tax has conceded something to that owner. Switzerland accepts valuation judgement and the disputes it produces. Norway accepts values that diverge from what a buyer would pay. Spain accepts a large exemption and a statutory valuation formula. None of the three has settled valuation, administrative cost and liquidity at once. Norway's most recent answer to the cash-poor owner is a statutory deferral: from the 2026 income year, wealth tax on business assets can be postponed for up to three years, on amounts of at least NOK 30,000, at interest set five percentage points above Norges Bank's policy rate. That is a debt too, owed to the state instead of a bank, and it accrues. It buys three years at a price. The Norwegian provisions and Spain's family-business exemption above were current as at 12 August 2026, and article 25 as at 2 September 2026; Norway resets its rates and thresholds every year.

What the design has to contain

Deductible liabilities are defined in statute, as Spain's article 25 and the UK's Inheritance Tax provisions define them, so a debt is a deduction only if the rules say so. Each debt is matched to the asset it funded: a loan raised to buy an asset the tax exempts, or one held outside the base, reduces that asset and nothing else, and where the asset is only partly exempt the deduction is only partly allowed. A debt counts only where it is evidenced, which is Spain's first condition. And the matching is tested at one valuation date, the same 5 April on which the assets are valued. The OECD's design advice makes the mirror-image point about assets: where values are assessed at a specific date, it recommends rules against artificially lowering the value of assets just before that date. The same discipline belongs on the liabilities side. That is a recommendation, and this article is a proposal; neither describes UK law.

Nothing here makes borrowing illegitimate. A mortgage on a house that is in the base comes off the house. A loan that built a business comes off the business. The owner who borrows to pay the charge owes a lender instead of the Treasury, and still owes. What the rules remove is the version of the recipe in the opening paragraph where the debt is owed to yourself, kept alive for the tax saving, or set against an asset the tax was never going to reach. A net base is only as sound as the deduction rules behind it. Read those before the headline rate.

Sources and evidence status

Office for National Statistics, Household total wealth in Great Britain quality and methods guide (revised 7 July 2026) and Household total wealth in Great Britain: April 2020 to March 2022 (released 24 January 2025), used here for the definition of the four components and the treatment of debt only; no wealth figure from the survey is quoted. OECD, The Role and Design of Net Wealth Taxes in the OECD, OECD Tax Policy Studies No. 26, 2018: definition at Chapter 1 p.16, the anti-manipulation recommendation at pp.86 to 87 and the overall conclusion at pp.11 to 12. Ley 19/1991 del Impuesto sobre el Patrimonio, art. 25 (deductible debts, consolidated text last amended 14 December 2000, retrieved 2 September 2026) and art. 4.Ocho (family-business exemption), with Finance Act 1986 s.103 and Inheritance Tax Act 1984 ss.162A, 162B and 175A as inserted by Finance Act 2013 Sch. 36, retrieved 2 September 2026. Skatteetaten, Defer payment of net wealth tax calculated on business assets, and the comparative reading of the Norwegian, Spanish and Swiss regimes, verified 12 August 2026. Threshold, tax unit and valuation date of the model this series references: a policy proposal, not enacted law.

The ONS definitions are T1 Verified Facts drawn from the named documents. The OECD material is T5 Economic Interpretation, quoted as the report's own wording; nothing from it is presented as OECD endorsement of a UK net wealth tax, and the report's conclusion that the arguments for such a tax are limited where capital income and inheritance taxes already exist is stated above. The Spanish, UK and Norwegian provisions are T8 Legal or Regulatory Statements, current at the dates given; the UK provisions belong to Inheritance Tax and are cited as evidence of how statute defines a deductible debt, not as a wealth tax and not as a proposal for one. The comparison of the Swiss, Norwegian and Spanish regimes, and the statement that none of them has settled valuation, administrative cost and liquidity at once, are T5 Economic Interpretation drawn from those provisions rather than anything the three publish about themselves. The reference model's threshold, unit and date are a T4 Policy Proposal. No figure for the amount of borrowing these rules prevent, for their enforcement cost or for the scale of debt-based avoidance is asserted here, and none should be inferred.

Nothing here is tax advice.