If only Ritchie knew some economics

Then he’d have heard of the lifetime savings hypothesis. Meaning that this steaming pile of tripe would be obviously wrong even to him:

I do, of course, welcome a crackdown on inheritance tax avoidance. It is necessary. Inheritance tax losses already, according to HMRC, cost the UK at least £400 million a year, or at least 12% of the inheritance tax yield.

Actually, I would suggest that this estimate is a work of fiction, but not because of avoidance but because of evasion. Let’s offer a simple example of why this might be the case.

Based on HMRC data for UK wealth, extrapolated from inheritance tax returns, the UK is worth about £3.5 trillion in all, or £4 trillion gross of mortgages, of which £2 trillion is housing. Now I know that was 2010 data, but in many parts of the country house prices have not changed much since then.

According to Land Registry data on housing the average UK house price is currently £172,011 and there are 19.3 million privately owned homes in the UK (4.3 million of them are let out). That makes £3.3 trillion for that one asset alone.

That difference is going to work through to the inheritance tax yield in the end (and yes, I know about the surviving spouse exemption – but we all die in the end – which is the basis on which the HMRC data works).

Something, somewhere is being seriously under-reported for inheritance tax and i suggest that it is evasion and not just avoidance in play here. As for the loss, if anything like £1.3 trillion of value is going missing from reported estates the under-declaration is going to be a lot more than £400 million a year, even given the time over which that value would have to be declared. It could run to billions a year.

Think through the assumption he’s making there. That all of the wealth of the nation passes through the inheritance tax system at some point or another. So, if wealth in the nation is greater than the amount of wealth passing through the inheritance tax system therefore there must be evasion of inheritance tax going on.

This an error which even an A Level in economics would help you to avoid. For we’ve this thing called the lifetime savings hypothesis. We save when we’re young in order to be able to consume when we’re old. And that means that the maximal wealth point is not the point of death: it’s the moment we retire, when we stop saving and start consuming that accumulated wealth. This is obvious if your pension pot is used to purchase an annuity: that wealth then is consumed between the annuity purchase and death. But this also happens to houses: it’s actually the law (or was until recently?) that you had to sell your house to pay for your old folk’s home stay. That’s consuming wealth before it reaches the inheritance tax system. And even Murph can’t start claiming that that’s tax avoidance or tax evasion now, can he?

Some goodly chunk of lifetime wealth is consumed before death: thus we cannot say that a gap between the amount of wealth in the country and the amount of wealth going through the inheritance tax system is symptomatic of tax evasion.

19 thoughts on “If only Ritchie knew some economics”

  1. much as I like to promote an education in economics, I expect most people could figure out that savings are consumed in retirement without the benefit of one

  2. Yes but that then surely negates the point that “all” the wealth passes through the IHT system at some point. Actually some (large) portion of it gets transferred legally, whether it’s passed through one of the loopholes or exemptions, or is simply spent on champagne baths on yachts, before its owner dies.

    Personally I want to pay more inheritance tax (being without issue I will probably pay 100% inheritance tax anyway) in return for lower income taxes while alive,

    I really like the idea of paying my taxes once I am dead, rather than when I am still alive.

  3. Obviously all wealth will eventually pass through the IHT system (if you can be sure what wealth it is), just that some might go through that once every generation, some will go through it rather less often for various reasons. Particularly wealth that gets consumed – thus turned into the wealth of the suppliers of that consumption.

  4. @BlokeInGermany – a cunning plan, but wouldn’t it tempt you to take the lower taxes now and spend like a drunken sailor on shore leave/Gordon Brown [delete as applicable] thus leaving nothing in the taxable kitty apart from two bent pennies and a dead rat?

  5. I suspect the answer is a (slightly) more complicated.

    The ritchie estimate of housing wealth is close to that of of the ONS WAS (page 2 table 2.1)


    The HMRC number is based on estate data adjusted for population and mortality rates (table 13.7):


    Now in theory, given that the middle aged who have not yet consumed their houses are represented by those who have died in middle age, this number should match (roughly) the number given in WAS. I’d guess the difference is that the rich middle aged die less than the poor middle aged, giving us a skewed picture from the HMRC numbers – mortality is low at the ages when wealth accumulation is highest.

  6. FA>

    “a drunken sailor on Gordon Brown” (having deleted as applicable)

    That would have to be one extremely drunken sailor.

  7. But if the average house price is £172k and the inheritance tax threshold is £325k then surely no-one “on average” should be paying inheritance tax on their property ???

    Of course there is a distribution about this average and many are above this threshold. But many more are below it.

  8. Frederick

    the HMRC figures are based on a grant of representation. Some estates do not pass through this way – because they pass to a spouse when the asset is held jointly or because the estate is low value (below 5K). However, even if the asset is below the taxable threshold (350K), in many cases we would be able to count it via the HMRC numbers since they include all estates above £5K or so.

    The joint names/spousal exemption probably also plays a role in the lower HMRC estimate relative to the ONS WAS.

  9. Isn’t the solution obvious? Wealth should be assessed for iht at the moment of retirement , since there can be no reason to consume that wealth except for the purpose of avoiding iht.

  10. Bloke in Costa Rica

    Even if we take Dickhead Murphy’s figures at face value, £400 million is about what the State spends between the stroke of midnight on New Year’s Eve and 5 a.m. on January 1st. On three quarters of a trillion quid it’s a rounding error. Inheritance tax is a ludicrously inefficient tax. I don’t know if it has the absolute highest deadweight costs of any tax (no doubt our esteemed host will know) but it is absolutely clear that the government would not now be making importunate and grotesquely illiberal noises about taxing inheritance during the lifetime of the legator were it not the case that an awful lot of economic activity is forgone in attempts to avoid it. Much better to simply scrap the whole idea.

  11. I personally – if it wouldn’t create a whole bunch of perverse incentives and other problems – tax all inheritance at 100% and put it in a fund to distribute to everyone at age 21. The state would only get admin costs (I know, it’ll never work that way, but bear with me) .

    The problem with inheritance, apart from the lucky sperm club thing, is that you get it when you least need it. These days it is practically your retirement package. Can’t we instead solve the problem of kids unable to move out of their parents’ house, afford an education, and so on? The sensible will use it for just such – get on the property ladder, pay for their degree, start a family or business, whatever. The rest will blow it on cocaine and whores, which is then their problem.

    You can couple this with a drastic scaling-back of the welfare state. After all, having been given a fantastic start in life, you are more responsible for your own position should you screw up. Again the reason for waiting until 21, when we can reasonably expect people to have a little more maturity.

    I am not quite sure if this is a radical liberal position or a profoundly illiberal position, or perhaps both. I am sure that, humans being apes rather than ants, we couldn’t make it work, for largely the same reasons that communism didn’t work.

  12. Bloke in Germany – aside from it being profoundly illiberal, it would have several obvious consequences, each requiring even more illiberal intervention to compensate:

    Half the EU will immigrate at 20.5 years old, and then bugger off at 21.5, if not before.
    anyone with half a brain will gift their stuff to their kids, or spend it, possibly leaving themselves destitute at 85 and relying on the social.

    I’m sure there’s more drawbacks too…

  13. @BiG “Can’t we instead solve the problem of kids unable to move out of their parents’ house, afford an education, and so on? The sensible will use it for just such – get on the property ladder, pay for their degree, start a family or business, whatever.”

    What effect would that have on house prices and the cost of degrees?

    Not that I don’t think housing and inability (or certainly reluctance) of intelligent young people to breed is not a problem.

  14. BiG is just wrong.
    You’ve got to be very old in order to die after the youngest kid has paid off his/her mortgage – and in that case the grandchildren have probably got mortgages. I bought my first car from the proceeds of an investment I made using the legacy I got from my grandmother (I was born with one grand-parent and one great-grandparent, the latter died when I was 2), my father died before my elder son was born and my mother died when the younger was 5.
    I am not saying that everyone is in the same boat as me but BiG’s sweeping assertion is simply refuted.

  15. If the tax did not apply to inheritance by grandchildren, wouldn’t that create rather positive incentives? Would that win the grey vote?

  16. I know, I know…

    But the reason that the Dick has made this error is because he will keep increasing his wealth, as I’m sure he will keep spouting drivel to his last breath.

    Only death will put an end to these witterings.

  17. Rib-a-dub: this is one of the standard planning/avoidance techniques. Stick £325k into a trust for your grandchildren at least 7 years before you die, and there’s no IHT on it and the income tax position is a lot better than if the parents do it. Start when they’re young and you can hopefully get several rounds of funding in, 7 years apart.

    One view is that this is exactly what IHT is trying to encourage: give the youngsters a start in life. The other view is that as you’re not paying tax it is ipso facto abusive.

    From talking to the grandparents who care deeply about their grandchildren, I incline to the former view.

    The latter view leads to an absurdity, I think. If you shouldn’t do anything with your wealth that doesn’t lead to an IHT charge, then we might as well ditch IHT altogether and just, oh, tax the wealth as you acquire it, so we then don’t care what you do with the post-tax amount. Some sort of “income tax”… oh, wait.

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