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The expected and actual yield of Inheritance Tax

December 29, 2012

I was struck by an article in the Financial Times by Lawrence Summers on 17th December, giving suggestions on how to reform the US tax system.

There was a great deal I agree with, or rather strikes an accord with issues facing the UK's situation.

Amongst many things, I found the following quote interesting:

A simple calculation shows that the US estate tax system is broken. Assets that are passed to relatives or other personal relations are often badly misvalued relative to what they cost on an open market. The total wealth of American households is estimated at more than $60tn. It is heavily concentrated in very few hands.
A conservative estimate given the lifespans of Americans would be that 2 per cent ($1.2tn) is passed down each year, mostly from the very rich. Yet estate and gift taxes raise less than $12bn, or 1 per cent, of this figure each year.

I wondered how this might compare with the yield from the UK's estate tax, inheritance tax (IHT). Making some guesses (and I use word rather than estimates, because I suspect there might be both GIGO and faulty process in my calculations, I come up with a similar conclusion: IHT raises far less than might be expected. A secondary conclusion, though, is that reforming IHT is unlikely to raise significantly more.

I have no idea whether my calculations are along the right lines, or wildly inaccurate; but maybe they provide something worth considering.

Net personal wealth in the UK £6.7 trillion (I)

Population 63m (II)

Wealth distribution: top decile own >£1.6m; second decile £1.2m-£1.6m; third decile £800k-£1.2m; remainder ignored (III)

Remainder own approx 1/2 of net wealth, say £3.3tn. Then the top three deciles own £3.3tn, £100m and £63m respectively. (III)

Assume £325,000 exemption accounts for none of the top decile, 1/3 of the second, and 1/2 of the third.

Assume wealth inherited every 70 years.

Then taxable estate pa is £50bn, of which £47bn is top decile people. This £50bn is far higher than the actual, c £9bn.

Looking instead at the gross inheritance, I.e ignoring the lifetime exemption, results in a gross inheritance of £50bn (£3.4tn/70) which is close to the actual, c £33bn. (Iv)

Maybe my estimate of the effect of the exemption is understated; but the greater effect is such exemptions as business property relief, agricultural property relief, charitable exemptions and so forth. Of course, some of the top decile will be non domiciled and/or will have much of their wealth outside the UK. So, my conclusions are:

I) my calculations aren't totally ridiculous;

II) at most, estate taxes might raise £20bn pa taxing £50bn at 40%) rather than the £3bn or so they historically have done. Given the political dislike to estate taxes, this is not a great enough increase for the consequences.


(I) survey by Lloyds reported here Baby boomers with 80pc of UK wealth shouldn’t feel guilty about younger generations' problems – Telegraph Blogs and elsewhere; at c £100k per person, £6.7tn is plausible. It also bears comparison with the $60tn cited by Larry Summers in his 17/12/12 FT article.

(II) googled, 12/12

(III) googling, including these images wealth distribution uk – Google Search

(Iv) HMRC website, latest figures 09/10; figures have been broadly constant for years.




From → Economics, Taxation

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