A new report confirms that inherited wealth increasingly benefits only Britain’s richest. Theresa May’s talk of social mobility will ring hollow until this is fixed
To those that hath, even more shall be given. That depressing biblical message is confirmed by the Institute for Fiscal Studies in today’s report on inheritance. More people stand to inherit than before, but the great majority of the wealth will go to the already wealthy.
The worst news is that inheritance is rapidly becoming a more, not less, important factor in people’s lives. As we become more unequal in wealth, inheritance is key. It was already the case: the wealthiest pensioners are those who themselves inherited most. But for the next generation that effect will grow. Some 90% of inherited wealth will go to half the next generation.
Theresa May, launching her brief leadership bid in July, warned that: “The divide between those who inherit wealth and those who don’t will become more pronounced.” Does she mean to do anything about it, any more than Margaret Thatcher on the steps of Downing Street intended to follow the path of St Francis?
George Osborne left behind a lavish legacy for the rich that sees the inheritance tax threshold rising year by year, to £1m by 2020. There was not a whisper in Philip Hammond’s autumn statement that he intends to stop that, or to look for other ways to redress this growing wealth gap, mainly the result of the insane property price boom over recent decades.
Politicians of all parties preach pieties about wanting more equality of opportunity and more social mobility. Better education, more skills, boosting individuals’ abilities is their answer. But a lot less is said about the great wealth undertow that makes it so likely that children will follow a predictable destiny based more on their parents’ wealth, income and status than on their own talent and effort.
Historically, inheritance tax has been a significant leveller, helping to break up ancestral accumulations of wealth. The late 1970s were the most equal time in our history, but Thatcher blew the lid off top earnings and at the same time cut taxes on income, wealth and inheritance. Inequality soared and never recovered. Today’s IFS report shows it is set on another upward trajectory.
Everyone may have different ideas about what is “fair” and how equal we should be, but most people, except for extreme libertarians, are uneasy at heading backwards towards ever greater social injustice. One response from the right has been an eager grasping at genetic explanations: the rich produce cleverer children, so their privilege is just a fact of nature. Steve Jones, the celebrated geneticist, replies that “success and failure depend far more on the economic than the genetic accidents of birth”. Wealth is considerably more heritable than genes. He points out that the most equal nations with the best Gini ratings – the most commonly used measure of equality – also score the highest in average intelligence. That’s just one of the measurable ways in which more equal societies prosper.
But the hard fact is that inheritance tax (IHT) is hated. Osborne’s disgraceful £1m IHT bribe was enough to fatally frighten Gordon Brown off calling an election he might well have won. Last year the Fabian Society, a leftwing thinktank, conducted intensive opinion research among people of all incomes and political leanings, and IHT came out as the most detested of taxes. No use trying to tell people that only very few of the richest estates ever pay it: every homeowner imagines all their wealth will be snatched by the state on their death.
The dramatic answer, the Fabians suggest, is to abolish it altogether. It’s full of loopholes the rich can glide through, with trusts set up by all those “tax planners” who advertise so prolifically. Any amount can be gifted pre-death if you manage to survive a magical seven years after giving it away. Instead, the Fabians propose, impose a lifetime gift tax not on the giver, but on the receivers, taxing as income whatever they get before or after a parent’s death.
Alternatively, we could have fair property taxes: homes are not taxed at all, and yet that is where all this burgeoning wealth comes from. My generation bought cheap homes, and saw them rocket in value, in boom times earning more in a day than we earned going out to work. This unearned, unmerited, untaxed wealth needs to be captured in one way or another, at some time in people’s lives or deaths.
That soaring bricks-and-mortar wealth damages the economy and still fails to encourage more homes to be built. Property wealth needs to be collected and redirected to struggling young families with no chance of owning their own home. Start with a council tax that genuinely reflects the value of homes: currently, with no revaluation of tax bands since 1991, it’s capped very low for valuable properties, while squeezing money out of those with nothing. US states levy property taxes and so should we, to chill the market and raise funds for housing. Time too to look at other ways to tax the elderly wealthy to pay for their own social and medical care, so the burden doesn’t fall on a poorer younger generation.
This report is yet another brutal reminder that Britain is going backwards. The IFS concludes: “Today’s young adults will find it harder to accumulate wealth of their own than previous generations did, due to the sharp fall in home ownership, the dramatic decline in defined benefit pensions in the private sector, and the stagnation in household income.”
Let’s have no more crocodile tears from this government about social mobility until they confront this shocking reverse. What future for a society where the older generation eats the young? Or at least the young not born into the top echelons.