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Inherited inequality clogs up society's arteries
Unearned wealth is becoming more important relative to earned income in determining life chances and outcomes. We need to level the playing field before we find ourselves back in the Edwardian era.
We’ve known for a while that inheritances are having a growing impact on people’s lifetime incomes, and that they are very unequally spread. Last week, the Institute for Fiscal Studies published a report showing that gifts made while parents are still alive are also having a huge - and unequal impact. They’re smaller in total value than inheritances, but because they are generally received at an earlier stage in people’s lives, they have an enormous influence on life chances and outcomes.
The numbers on inheritances are usefully summarised in a recent briefing paper from Demos (building on sources including a Resolution Foundation briefing and previous IFS reports from 2020 and 2021). Some of the arguments are rehearsed in last year’s Fairness Index. And the statistics are pretty shocking. Around £100 billion is inherited in the UK every year. For people born in the 1980s, the top 10% of inheritors could expect to inherit at least £495,000 during their adult lives, while those in the bottom 10% could expect to receive practically nothing (less than £850). Unsurprisingly, given ONS figures showing Black households have on average zero property wealth and related Resolution Foundation analysis, the data cited in the reports also shows huge racial inequalities in inheritance.
What have we learned about lifetime wealth transfers from last week’s IFS report? They represent about 17% of the value of inheritances (£13.5 billion per year for gifts, £3.5 billion for loans), and they’re rising, driven by increasing levels of wealth, people living longer, and younger generations finding it increasingly difficult to get onto the property ladder. This is prompting more and more parents of adult children to transfer more of their wealth to those children while the parents are still alive (which also reduces the amount that is subject to inheritance tax), and when their children need it most.
Although gifts account for a smaller proportion of recipients’ lifetime incomes than inheritances, they are much more important than the raw figures suggest. The IFS analysis shows that 52% of the value of these gifts was used to buy property, while 15% was saved or invested. Wealthier recipients were more likely to use their gifts in these ways. Less-wealthy recipients were more likely to pay off debts, cover educational expenses or buy a new car. This variation in how gifts were used exacerbates the inequality in the spread of the gifts themselves, which is significant:
6% of adults received at least one gift in the last two years; the largest 5% of transfers made up more than half of the total value of transfers received
The amounts received by the highest-income fifth were 26 times bigger than those received by the lowest-income fifth
As David Willetts pointed out in his response to the report (22:36 in), the IFS analysis captures the immediate financial value but not the long-term value of those gifts (and therefore misses the long-term inequalities that result from their unequal distribution). Gifts that allow people to get onto the housing ladder in early adulthood will dramatically reduce their lifetime housing costs and increase their assets.
We already know that there is a 26x discrepancy in the value of gifts received between the top 20% and the bottom 20% (which of course hides a much larger discrepancy between those at the extreme edges of both groups). And we know that those in the top 20% are much more likely than those in the bottom 20% to spend their windfall on housing. It doesn’t seem too unreasonable to multiply the discrepancy in immediate financial value by a factor of five when estimating the long-term discrepancy, to take into account the long-term gains realised by investing in property (or pensions or other investments) in early adulthood. This leads to a 130x discrepancy between the top 20% and the bottom 20%.
We’re not yet at the point where inheritances and gifts represent a similar proportion of national income to the high point of inequality at the turn of the 20th century (22%), but the direction of travel is clear. We’re returning to historical levels of inequality, and much of this is being fuelled by wealth inequality and driven by the increasing importance of inheritance.
Children already have hugely different life chances based on the circumstances into which they are born, and the impact of socio-economic and other inequalities on their educational and career prospects. Added to this, we now have a clearer picture of the massive inequality in parental financial support, and its impacts on the ability of young adults to build a secure future for themselves and their families.
As David Willetts went on to say in his comments at the launch of last week’s IFS report, we can’t blame parents for wanting to help their children, or for their shrewdness in supporting their children at the stages in life when this support is most needed - especially in a context of broader socio-economic insecurity. Willetts argued, however, that we need to be good citizens, not just good parents, and that this means taking steps to counteract the inequalities that result from the well-intentioned support that wealthier parents provide to their children.
Because these inequalities are, undeniably, deeply unfair. They offend every principle of fairness. They exacerbate a situation in which one in five families are unable to provide the essentials. They make it impossible for people with fewer resources to enjoy the same opportunities as their wealthier peers. They make a mockery of a society that claims to be a meritocracy but that fails to reward people fairly for their work, let alone allow them to build up their wealth by saving as they earn. They undermine the principles of fair exchange and fair treatment that are fundamental underpinnings of the social contract.
Remember the Liz Truss argument that we needed to focus on boosting growth instead of tackling inequality? This never made sense, because growth and equality aren’t mutually exclusive. The reverse is nearer the truth; inequality acts as a break on growth. Inequality of inheritance is a good example of this. Increased inequality between people with richer and poorer parents reduces social mobility, and wastes the potential of millions of people whose productivity could underpin our economic wellbeing for generations to come. In this sense, inherited inequality, as part of the wider phenomenon of inequality of opportunity, is like cholesterol, clogging up society’s arteries.
We need to take remedial action before our diseased economy has a heart attack and keels over. The Intergenerational Commission put forward a neat solution in 2018:
Abolish inheritance tax and replace it with a lifetime receipts tax that is levied on recipients with fewer exemptions, a lower tax-free allowance and lower tax rates. Use the extra revenues to introduce a £10,000 ‘citizen’s inheritance’ – a restricted-use asset endowment to all young adults to support skills, entrepreneurship, housing and pension saving.
A citizen’s inheritance would cost less than 1% of public spending. By helping to launch people into adult life, irrespective of their background, it would help build a fairer society and rebuild our broken social contract. It’s time for a proper public debate on the issue.