What caught my eye this week.
There’s a growing sense – I’d argue a reality – of intergenerational inequity in the UK, as with many other developed countries.
Whether the old having so much more than the young is an inevitable consequence of late capitalism, a comorbidity of a broken housing market, the demographic bulge bracket baby boomers not paying their way, or just what happens when an economy is no longer booming like it did in the 1950s and 1960s is hard to tell.
Probably it’s a bit of everything. But in any case, assuming we don’t want to transition permanently into neo-feudalism, the next question is what’s to be done?
One option is to directly favour the young with government largesse. For various reasons, mostly political, we’ve triple-locked away that solution for now.
The other obvious redress, redistribution, is even more controversial. At least outside of the editorial meetings of Socialist Worker.
Redistribution – taxing those with more to give to those with less, obscured by so many smoke and mirrors – at least treats the thing directly. Handy if the age aspect is a red herring, and really we’re just looking at greater wealth inequality.
The big snag though is that redistribution tends to infuriate those whose stuff is being redistributed.
As the UK tax take of GDP soars, statistics showing the top 1% already pay 30% of all income tax imply they have a point – even if income tax is not everything.
The bank of grandmother and grandad
There’s one kind of redistribution that both the richest and the rest of us tend to support though.
And that’s inheritance passing wealth down the generations.
True, long-time readers know that this is where I’d personally position the nation’s best tax-collecting apparatus.
On both moral grounds and in light of my neo-feudalism fears, I’d far prefer to tax dead people who can’t feel the pain than young people working, saving, and still not having enough money for a house deposit or a proper pension.
But hey, I’m in a minority. Inheritance tax is widely considered to be the UK’s most unpopular tax. Most people hate it.
And yet it exists – and from the perspective of its critics, it gets in the way of the frictionless redistribution from the father to the son.
(And the mother and daughter of course, but as we’re in the realms of neo-feudalism here, let’s have all the trimmings!)
How soon is now?
By far the best and easiest way to avoid inheritance taxes tithing such wealth transfers is for the eventually-to-be-deceased to give their money away sooner.
Currently no tax is due on anything given away if you live for seven more years.
To me, this longevity lottery seems a bit ridiculous – if again entirely in keeping with the same medieval thinking that makes inheritance taxes so unpopular.
Why should a family be penalised because a beloved elder gets an unexpected cancer or meets the wrong end of a bus?
Nevertheless, encouraging the rich to pass down their wealth sooner does have one undeniably huge benefit, as Jonathan Guthrie outlines in a (paywalled) article in the Financial Times this week.
As things stand, Guthrie writes:
…the most striking feature is how little we decumulate. Most folk die with more than 60 per cent of their peak lifetime assets.
Adult offspring are therefore liable to inherit large sums when they themselves are approaching retirement, when the utility of the money may be lower.
Giving sooner improves the lives of heirs earlier, and in material ways. Perhaps the chance for a parent to take a few years off to care for young children, or for a family to buy a house with bedrooms for all the kids from the start. Compare such uses to the money simply sitting in a septuagenarian’s bank account, maybe with a bit of the interest funding one more Caribbean cruise that gilds the lily.
Earlier inheritance might even help with the housing market, if it reduces the tendency for older generations to rattle around in big houses full of rooms they don’t use while young families grin and bear an open-plan kitchen-diner-hallway-sofa-bedroom.
Well, solves it for the moneyed classes at least. But that’s neo-feudalism for you…
An age-old story
Guthrie suspects traditional inheritance practices have yet to adjust for extended longevity, writing:
When lives were shorter and child-rearing began earlier, legacies from dead parents materialised closer to the point of greatest utility for heirs.
This must be right. Even oligarchs in the Middle Ages were lucky to make it to 60.
Naturally we all want to live longer lives. But if it means ever more wealth piling up at the right-hand of the curve where it’s unlikely to ever be spent, then something – literally – has to give.
I’d suggest if we’re to avoid a ‘Gen Z Uprising’ in the history books alongside the First Baron’s War, the Peasant’s Revolt, the Boston Tea Party, and the Bolshevik Revolution then more efficiently keeping it in the family isn’t going to be enough in the long run.
But getting wealth redistributed sooner – to where it will do the most good for those who are fortunate enough to inherit – is at least a start.
Have a great weekend.
p.s. Thanks to everyone who entered our Christmas sweatshirt competition. I’ll contact the winners this weekend to make sure they’re not Russian chatbots or whatnot, and announce the ‘lucky’ recipients next Saturday!
From Monevator
What derisking your portfolio looks like [Members] – Monevator
Surviving system meltdowns and cyber attacks – Monevator
From the archive-ator: Are you ready for interest rate cuts? – Monevator
News
British economy shrank by 0.1% in October – Sky
“I’m helping first-time buyers onto the ladder because the government isn’t” – Standard
‘Moron premium’ costs the UK up to £7bn a year – This Is Money
Huel and Moneybox head to No 10 as chancellor Reeves courts scale-ups – BBC
Government launches review of energy standing charges – This Is Money
EU backs indefinite freeze on Russian cash ahead of Ukraine loan plan – BBC
Teenager who received world-first Leukaemia treatment is now cancer-free – Independent
Unusually, long-term US interest rates have risen in the face of Fed rate cuts – Apollo
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Could UK mortgage rates be below 3.5% by Christmas…? – This Is Money
…and where are buy-to-let mortgage rates today? – Which
Interactive Investor will rollout new prices in February – Interactive Investor
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Monzo and Zopa launch new cash prize draws – Which
Even with £50,000, Premium Bonds are a lottery – Be Clever With Your Cash
Do green mortgages offer better rates? – Which
iWeb is no more, it’s all Scottish Widows now – Simple Living in Somerset
Are cinema memberships worth the money? – Be Clever With Your Cash
Cozy cottages for sale at Christmas, in pictures – Guardian
Comment and opinion
Overcoming financial hopelessness – Financial Samurai
Boring investing still works – A Wealth of Common Sense
Are we in an index fund fuelled bubble? – Humble Dollar
The planet-sized error of treating bonds like stocks – 3652 Days
Financial wellbeing if you’re broke but happy – Advisor Perspectives
Defensive investing: what 200 years of data says [Research] – SSRN
Never too much about SOR and SWRs mini-special
The biggest risk for new retirees – Morningstar
Revisiting ‘safe’ retirement rates for retirees – Capital Spectator
Naughty corner: Active antics
Hold the dip [PDF] – AQR
How investment trusts are adapting to the new realities [Paywall] – FT
Does private equity really beat public market investing? – Larry Swedroe
Berkshire Hathaway sets the table for Greg Abel – Kingswell
AI in venture capital – Enterprising Investor
Bitcoin ETFs are new. Investor underperformance is an old story – Morningstar
Kindle book bargains
Quit: The Power of Knowing When to Walk by Annie Duke – £0.99 on Kindle
A Man for All Markets by Edward Thorp – £0.99 on Kindle
The End of Reality by Jonathan Taplin – £0.99 on Kindle
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Or pick up one of the all-time great investing classics – Monevator shop
Environmental factors
Will net zero really cost UK households £500 a year? – Guardian
Rising sea levels are already affecting US home prices [Research] – Richmond Fed
GDP growth no longer linked to carbon emissions in most of the world – Guardian
Would you pay up for climate pledges? – Klement on Investing
White storks to make historic return to London in 2026 – Guardian
What if the economy was modelled after ecology? – Atmos
Robot overlord roundup
The case that we’re over-investing in AI infrastructure – Paul Krugman
To grow we must forget, but AI remembers all – DOC [h/t Abnormal Returns]
Can machines suffer? – Aeon
Creatives bemoan the impact AI has had on their jobs… – BBC
…but tech veteran Tim O’Reilly argues we can thrive with AI – Big Think
Meanwhile, Moonpig says use of AI is driving up greetings card sales – Guardian
Not at the dinner table
13 rebel Labour MPs join Lib Dems in vote for talks on rejoining EU customs union – BBC
Everyone is gambling and no one is happy – Kyla Scanlon
US could ask tourists for five years of social media history – BBC
Europe is under siege – Noahpinion
America has become a digital narco-state – Paul Krugman
Trump pardons like a super-villain from Batman… – The Bulwark
…and this recipient went straight back to his old tricks – Bloomberg
Off our beat
The longest solar eclipse in 100 years is coming – Wired
How Britain lost its shipbuilding industry [Podcast] – A Long Time In Finance
With ‘super-flu’ circulating, should you get a vaccine? – BBC
Understanding carriage [On Netflix / Time Warner] – Seth Godin, Stratechery, Variety
Stagnant construction productivity is a worldwide problem – Construction Physics
If war broke out how long could Britain really fight for i? – BBC
The art of loitering in London – The Londonist
Why we save anything at all – The Root of All
And finally…
“Money often costs too much.”
– Ralph Waldo Emerson, The Conduct of Life
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Personally I’d prefer a flat tax, I can’t see the justification for most of the country avoiding it just because they live in an area where property prices are lower.
I’m not sure how the figures work out but there is a case for making it low enough that it isn’t worth the effort to avoid.
Having said that my least favourite tax is stamp duty, it’s a drag on the economy and should have been eliminated a long time ago.
Here to read about money and investment, but really, more politics? I already quit the paid subscription after the last political rant from @TI, now I must postpone rejoining for some more months.
This thinking is based on the assumption that there is a fixed pie and we need to rob Peter to pay Paul. Consider how things were 200 years ago. Aristocracy owned all the land, everyone else was a peasant. What has happened since then? Some re-distribution, but an awful lot of everyone doing better. Could we not think more about what in the US is known as an ‘abundance mindset’ rather than a ‘scarcity mindset’? Hand-ups rather than incentive destroying hand-outs?
The Guthrie quotes strike a chord. I am 70, have spent 24 years shepherding and accumulating the pot, I have de-risked, mainly to avoid the coming IHT change, so why do I find it so hard to begin to decumulate? I guess it is because, over time, the pot has become ” my precious”
Perhaps my kids will become as exasperated with me as I did with my parents when they refused to spend the kids inheritance.
@TI. Still can’t quite get why you think that redistribution (theft) of individuals wealth by the State will have a better outcome than the market place of individuals deciding how to redistribute (give) their wealth.
I think you are of the opinion that the free market, on balance, is far more effective at dragging the masses out of poverty than a govt. centrally planned economy (I don’t think there are any historical exceptions to this) – so why would wealth redistribution be a special case where the State is more effective ?
@Algernond — I don’t necessarily think IHT is better than the free market. But I do think it’s better than income tax. This is the bit we always disagree with. Your point is a case against taxes, not pro-IHT. Given we have taxes and a state etc, I prefer IHT.
@Baron — You’ve made this point at least half a dozen times. I last addressed it last week and to be honest I’m bored of your near weekly complaints.
See: https://monevator.com/weekend-reading-a-dawning-realisation/#comment-1923519
If you don’t like our site don’t read it. No hard feelings. Simple! 🙂
Will delete from now on without further comment. Cheers!
Since few of us know or choose the time of our passing, there is an instinctual fear of running out of money. And, having managed money for 3 relatives paying for residential care, and looked round numerous institutions, the fear is understandable. This is another issue successive governments have flunked.
We have helped our daughter at an age where the money was of maximum utility to her, and (hopefully!) with at least 7 years in hand. We are also helping through an account linked to her offset mortgage – which enables us to help reduce her mortgage payments/term, whilst retaining ownership of our capital for future needs. Perhaps this inter generational deployment of capital should be encouraged more widely?
Personal view is that I’d rather give £50k to someone in their twenties than £500k to someone in their sixties – as if they spend that £50k right they might not need the £500k in their sixties.
Equally people should remember that care is expensive if you don’t want to be dumped in a ditch in your old age. First to support in home quality of life extension (while owning a home), then £1k per person per week (probably having sold a home).
Otherwise people shouldn’t be too afraid of spending it and enjoying it before they die. Targeted inheritance can offset the guilt by giving people what they need at the times they need it most.
@ TI. Hmm,
‘assuming we don’t want to transition permanently into neo-feudalism’
I don’t accept the way you have framed this question. I shan’t comment further.
As I think Denis Healey so accurately observed, Inheritance tax is really a voluntary levy paid by people who trust the Government more than their heirs.
So in terms of fairness agree that IHT really should be much higher and bearing more of the burden of tax redistribution.
IHT is much lower in many far more successful countries than ours – the US being a prime example where the threshold is 12m USD I believe.
Seriously brah
@Part-time Analyst you’re doing well if you can find a home for £1k/wk, especially a specialist dementia care home (EMI), which is typically when home care becomes unmanageable. Double that and some.
Redistribution takes from the supply side and adds to demand, from the productive to the generally unproductive, increasing welfare dependency, crowding out private markets. Not taxing the rich allows for compounding at the most efficient points of supply
Also there is a natural redistribution anyway through inflation, from creditors to debtors. Inflation might give a skewed view of inequality by how debt leverages it
@Matthew “Redistribution takes from the supply side and adds to demand, from the productive to the generally unproductive, increasing welfare dependency…”
Actually, in terms of Inheritance tax, redistribution takes from the entirely unproductive (i.e. the dead) and uses it to pay for schools, hospitals, roads and infrastructure (amongst other things) which contribute productively to GDP.
Add possible/probable private medicine costs to carehome fees as NHS waiting lists get longer and longer.Another hurdle for older retirees
xxd09
I’m glad to see that paying for long-term care has already been raised in the comments. This question is so often ducked when the question of holding on to wealth versus making large lifetime gifts is raised. It should also be remembered that there is a deprivation of assets test in any means assessment for local authority care support.
Care and the uncertainty of huge bills is certainly a problem. However I don’t think under-taxing (IMHO) inheritances really solves the problem. For example, plenty of people who are old and want to spend their money they’ve earned when they are alive face the same difficulty, and are implicitly forced to self-insure against the possibility of requiring care.
What we need is clearly some kind of well understood opt-in private long-term care insurance. The problem is it’s likely to be pretty expensive (because a fair-sized chunk of people do require a year or two of care) but it’s only going to be fraction of the need to keep aside *all* the money you might need for yourself.
People (/The Telegraph) would probably object to it because they’d have to pay (say) £50,000 to buy into the scheme and they’d rather give that to their kids. But I think it’d be a reasonable deal, if we could be confident that the maths worked out and it wasn’t an excuse for larcenous insurer profits.
It wouldn’t solve the problem for the asset-poor majority, but this conversation isn’t about those folks.
repeating a little but……
uncertain need for care costs in old age can influence how much you might hold onto in later life.
If such costs were capped or covered by some insurance type arrangement then maybe those with savings could give some away to siblings or charity earlier.
@Faustus- the person may be dead, or just old and infirm, but the money is doing the work – by holding equities and bonds and reinvesting dividends they support the value of them on the secondary market, which means money is available to grow by issuing new shares/ bonds for companies that supply what people demand
There is a case for infrastructure spend, and defense spend, to support the business environment, but quite often it’s going on welfare as politicians can be vulnerable to public image
If it raises benefits, wages have to rise to globally uncompetitive levels, which is why we deindustrialised
If it goes on council housing, I’ve read that councils will sometimes outbid local buyers/renters because they have legal obligations and access to money, bidding up house prices such that in some jobs now you can almost only get housing through the council
The unthinkable level of fear now of cutting welfare shows how much dependency and crowding out it’s now insidiously caused.
And our lack of productivity growth is evidence – how can we compete globally when other countries that don’t have those globally high wages and other obstacles to business
Am with: IHT? More like UHT, know what I mean?
IHT is set at far too low a level in the UK and at a punitive rate. I like the idea of bequeathing money to my children and building up the future family’s wealth (growing on what my parents will leave me, who came from nothing).
Just because others don’t like that idea shouldn’t stop my family doing that by taking it from them at death.
Not sure the assumptions hold a lot of water in this week’s leader, TI. Might I suggest that the older people are richer (in one regard) because they have spent their youth earning and accumulating? And the classic redistribution that happens is that the young get older…and richer. Which of us would trade the other way if we could? So no need for a revolution…just wait and your turn comes. The Bolsheviks were just impatient.
Pretty sure the old people don’t take it with them when they stop being old people so it is a journey from zero to zero. The question is whether there is more wealth being generated than mouths to feed on that journey (scarcity vs abundance) and then how that is distributed. This pales into insignificance against levels of waste (moron premium article, energy, time).
I think we all believe in a state and even the most extreme versions of electable political positions in the UK end up with 30-50%. So how to pay for it? This obviously gets harder the more you take.
Since we’re in fantasy politics land. Measure the success of society by its poorest and work back from there. Attacking triple lock is an attack on the poorest in society. The issue is that pensions aren’t means tested…but then the apparatus for that would be expensive and horrendous.
Personally I’d go UBI. Basic state pension for all from 18. Basic housing, health and education provision. You’re not getting a council house in Mayfair. Sorry. No NI: it is a magic trick. Capital gains are indexed and counted as income. No personal allowance. No PPR relief. No IHT. No gift relief. Increase VAT. Allow unlimited tax-free saving. All withdrawals are income. Invest the crap out of forward looking infrastructure – tech, education, energy – and create in country mobility with free public transport. (Your council house is in Corby, sorry, but there is a train).
Noone is voting for me (arguably not strictly true). But then noone is voting for TI either!
I found the research paper on defensive investing strategies very interesting.
Is there a fee friendly way to invest in a Defensive Absolute Return fund and the trend following fund(s) as they define them?
It sounds like a semi active investing approach, but it feels like it could also be automated to a large extent. The need to short various factors to set up the DAR part and all the rebalancing sounds like an invitation to wipe yourself out with transaction costs but it feels like there must be a decent market for a product that smooths out risk when traditional equity/bond index portfolios have large drawdowns?
They do compare it to other approaches, eg funds where you go long the S&P500 but also have a sidebet buying some out of the money puts, think their sample is a bit too small to be conclusive, I’ve always thought buying index puts felt like the most direct way to hedge risk of market crash but everything has a fair price.
There really are people who pretty much hate everyone, but the tax man marginally more than everyone else. I know this because I am the son of one. He would never have distributed anything in his lifetime were it not for the 7 year rule, which therefore has real value in accelerating distribution.
There are a lot of people now without children. I’m one of them. So, no issue with IHT on my part. Having my wealth taxed while alive on the other hand would make me feel uneasy.
I’m with you TI on the neo-feudal argument. There has been a fair bit of discussion recently on how capitalism is broken due to unequal wealth and impact on democracy via populism. And these are not loony leftwingers.
Bloomberg had an interesting article on the subject just this weekend: https://www.bloomberg.com/news/features/2025-12-12/is-capitalism-failing-five-factors-that-broke-it-and-one-potential-solution
@Mathmo — Hola! 🙂 Not sure which premises you disagree with, but from the summary paper from the first link in my post:
The report notes though that even that picture is incomplete – and amongst other things ‘wealth transfers’ (i.e. inheritances) are driving much of the additional and persisting inequality.
From the UK parliament report cited by my second link (2015 report cited, but it will only have gotten more the case since then I think):
“What research exists suggests that today’s young will be net contributors to the welfare state, while the baby boomer generation will be net beneficiaries. The effect is likely to have been exacerbated by policy decisions to protect pensioner benefits while targeting welfare cuts on working age payments. The limits of that approach have been reached.”
Indeed that second article (which is from a partisan interest group) reads the data to find that boomers paid in about 20-30% of what they’ll take from the state, partly just because their cohort was so large.
But really, we don’t need all this data.
In London one used to meet, for example, teachers who’d bought terraced houses in Zone 2 London on their salaries without the Bank of Mum and Dad in the 1960s and 1970s. You don’t see that any more.
The intergeneration inequality may be inevitable as I say in my piece and it certainly has no easy fix, but I don’t think it’s really very debatable.
Great post @TI, thank you. I for one enjoy reading your slightly more political posts, and even more the follow up debate from a well informed, erudite community. Money. Politics. Similar stuff. There are few (any?) outlets from which such a diverse and balanced set of views can be had and certainly far more educational than sitting in your media echo chamber of choice. Even if the needle sticks occasionally!
Liked the piece on Premium Bonds. Had a conversation about these the other day. I use PBs as an emergency fund and consequently draw down and top up occasionally. I’ve noticed a propensity to be ‘luckier’ with newer bonds than older ones. Others said the same. One (a maths graduate) echoed this, and confessed to periodically cashing in and renewing. This clearly makes absolutely no sense unless….
Whilst likely a distorted perspective coloured by anticipation and wishful thinking, might be interesting to anecdotally extend the sample size from a readership likely more invested than average?
@Mathmo: “no one is voting for TI”.
I will. I think IHT is by far the best form of wealth tax, it doesn’t penalise anyone directly (the person whose estate it is is dead, and quite apart from no one having any “right” to be inheritors, they can’t inherit until probate is granted). And it only requires assessment of someone’s wealth once, on a date objectively determined. There is legitimate debate over the level it should be.
The generation issue is complex. There is a natural generational divide, I recall my first job discovering with a shock that I wasn’t going to get paid until the end of the month and subsisting on cheap pasta. Most people are poorer at that point in their lives. And if you contribute to a pension and buy a house with a mortgage your paper wealth will slowly increase even if that isn’t money you can access.
But changing life expectancy and later ages for parenthood have meant that most inheritances are to those already around retirement, not at the point in life where money would be of most benefit. The issue, as pointed out by others, is that people of that age are very aware of their risk of needing very expensive older age care and are psychologically deterred from gifting any inheritances to the following generation.
Never really understood arguments against inheritance tax, they usually seem to be more based on emotion than logic to me. Understandable, it is an emotive thing to think about after all, but I think care should be taken to be sure cool heads prevail.
The point about inheritances typically being received later in life as time goes in is very important – I certainly feel like I’ve passed the time that an inheritance would be particularly helpful to me, for example. It’s probably more useful for grandchildren than children for most people, I imagine. Though the idea of generational wealth sits uneasily with my more meritocratic feelings.
My impression was that in the UK it’s set at a bit of a weird level, most don’t pay it but the rate makes it worth finding out ways to avoid it, so as ever it actually raises more from middle classes/earners than anyone else (though the wealthier of those, compared with say income tax).
https://taxpolicy.org.uk/2023/09/25/iht_compare/
@Rob #23
If you type ‘Trend Following’ into the Monevator search, you will find @Finumus’ excellent article on Trend Following / Managed Futures.
Since he wrote the article, a few more funds have become available which you’ll see discussed in the comments.
E.g. the capital efficient “Winton Trend Equity Enhanced” which invests 200% of your money (100% Equity / 100% TF).
The AQR TF funds seem to be ‘knocking out the park’ over the last few years.
Not all platforms offer the same funds. E.g., you’ll find that the particularly well performing “AQR Alternative Trends” fund only seems to be investable on the iWeb / Scottish Widows / Lloyds / Halifax platforms (+IBKR), while oddly they refuse to allow investing in the afore-mentioned Winton capital efficient fund when all the other platforms seem to…
I’ve mentioned elsewhere that I’ve replaced the bond funds in my portfolio with Trend Following / Managed Futures.
I do remember having a smaller house than our peers -perhaps living more frugally too and spending a lot on children’s education (local comp) musical instruments etc etc
They were were told repeatedly that after Uni (all student loans paid off) they would be on their own -barring accidents- and that any money left now was the parents spending and that there might not be much leftover
Seemed to work and there will possibly be some monies left over but all three are over fifty now and well established and certainly not needing financial handouts
Carehome fees and medical expenses still a possibility though for the old people !
xxd09
Hola TI!
I typed a long response on the train home but seem to have lost it in the posting. Booo!
I read both papers, thanks. First much better than the second and mainly focused on your neo-feudalism (a touch fruity as a phrase for me, but get your point about escaping birth). Seems that Black men do much worse than Indian men in getting more income than their parents, but that paper comes with a lot of caveats on data and its finding are far from a smoking gun.
Probably important to distinguish between the idea that the young are poorer than the rich and the other related idea that it might be harder for the children of poor parents to become rich.
Does IHT help either? I think minimally. The paper suggests that education can account for half the difference and that must escape IHT. The ability to feed a child, get them to school every day, and to have time to pay them attention and encourage learning might not be a luxury of the super rich but might be hard for the super poor. We aren’t catching that with IHT. Indeed all IHT will do is pay for a few more civil servants when it could have been passed to (selected parts of) the next generation.
IHT can play a part if our goal is to salami slice as much tax out of the citizenry as Prof Laffer will allow us (rather than, say, cutting expenditure), but IHT doesn’t raise much and is mostly avoidable. I do not quite agree with your voter base that it does not affect the living: try paying the tax if you have bought a house and your antecedant dies in the 7 year window. I suspect it will eventually be abolished as a political sop, next in line after Stamp Duty.
I might pop that in my manifesto, together with the requirement to fully fund public sector pension obligations. Enjoy your majority of one. I shall heckle from the opposition benches.
Many excellent links (as always). Thank U.
DOC & Aeon quite thought provoking. What would suffering even look like for a disembodied consciousness? What is consciousness? What is suffering?
It’s a bottomless rabbit hole.
SSRN & AQR, very interesting. Per @Rob #23 and @Algernond #30: that Winton Trend-Enhanced Global Equity is one of the more useful offerings of recent times.
The fee is steep (110 bps) but you’re getting 200% exposure, systematically managed with half in TF.
Upvote @Matthew’s #14, #20 comments. We’re arguably not a rich country anymore. Can we afford to continue, indefinitely and with few limits, to subside lower productivity, whilst, in effect, penalising higher productivity? Demographics is destiny, and frankly the destination doesn’t look good. The world’s oldest average aged country (47 years on average, Japan) may be wealthier than the world’s youngest (15 years on average) but it will surely grow its economy far less rapidly. As the ratio of those in work to those not shrinks (with each successively smaller generation) something will have to give…eventually. That might mean allowing more immigration with fewer benefit entitlements; it might mean less working age benefits generally; it might mean a financial crisis (like 1976 ot 1947), it might mean any number of different things. But if something can’t go on, then it won’t.
Londonists’ loitering link: it’s been a long time since I lived in London, but going to Foyles in Charing Cross and to the Piccadilly Waterstones were two of London life’s simple pleasures. Looking back now, I do see what the Londonist means by the harsher lighting in Foyles.
@TI #18 before pension freedom, more or less everyone with a DC pot was required to purchase an annuity, although it didn’t have to be index-linked, and pensions seemed less popular as vehicles of wealth preservation. With the introduction of auto-enrolment, arguably an opportunity existed to mandate the sort of annuity/long term care insurance you suggest.
@2 more years (#27)
Re Premium Bonds
According to NS&I (on their FAQ page)
“Each £1 Bond number has an equal chance of winning, regardless of when or where it was bought. Over 97% of eligible Bonds have been bought since the year 2000. So even though Premium Bonds have been on sale for over 60 years, this is why newer Bonds seem to win more frequently. When ERNIE randomly generates winners, it doesn’t store any numbers, so there’s no way any Bonds can be left out.”
As your maths graduate friend will know, small probability random events (i.e., winning premium bond numbers) can appear to exhibit spurious patterns. A useful metric would be win rate (i.e. number of wins per bond held) as a function of age, but the stats will still be ‘lumpy’ (e.g., even with £50k currently, on average, you would expect to win 27 times per year with a standard deviation of 5. So, if you bought your £50k in 5 equal tranches 1 year apart, that would give an average of just over 5 wins per tranche with a standard deviation of about 1.
Selling and rebuying means that the bonds miss a draw and thereby 1/12th of the available winnings.
@AlanS – yup, 100%, get the maths. Was merely intrigued at debunking or mischievously furthering anecdotally through larger sample size. Clearly there could be no admission of skewing to encourage new investment!
@TI @Baron. Actually we could have a MV panto instead. Bags Widow Twanky!
@TI I’ve long thought we need some sort social insurance to cover late-life care costs – something like Obama care which everyone would pay into, but the minority would use for end-of-life residential care. But I expect there would be the Telegraph-type opposition you describe, and also opposition from the Treasury which (I think) doesn’t like to surrender control of revenue in hypothecated taxes.
One other idea: why couldn’t there be a tax-efficient way of paying care costs directly out of pension pots? Eg, you get to the point of needing residential care or dementia care (probably say for 2 years), and the costs are paid directly from a SIPP without tax being charged on withdrawals (or at a low rate, say 10%, above the personal allowance). I think this would soften the fear of running out of money to pay for care, which would allow pensioners to pass on inheritance sooner. And the government/local councils would get more funding into the social care sector.
I was interested in the PB article as well, and feel I should probably comment as this seems more my wheelhouse than fantasy politics.
NSI pretty helpful with disclosing probability of any win is 1/22000 so the distribution is best modelled as Poisson . Gives probabilities of £50k winning in any month ~ Pois(2.27) as:-
0 wins – 10%
1 win – 23%
2 wins – 27%
3 wins – 20%
4 wins – 11%
5 wins – 5%
This chimes with my experience.
In terms of returns. If you don’t scoop a higher prize (5k plus) then you expect to lose 10% of your 3.6% return so 3.2% (net of tax). But boy is it fun when you do land one of those…
I totally buy the idea we are already in a neo-feudal world but I’m not a fan of IHT. I don’t think it solves that. It’s a poorly designed tax, avoided completely by the super-rich. The oligarchs are why we have a neo-feudal society, not the moderately wealthy. It’s the power and influence of vast money that creates the massive state capture and vast levels of corruption we see in the US under Trump. It will be the same here under Farage.
So the issue is really the accumulation of vast capital piles. That comes back to the distribution between capital and labour being all wrong. Once too much capital has been accumulated, it’s just too late. The fact it can be handed down is just the cherry on the top for the oligarchs.
With regard to IHT planning, I’m already handing over gobs of capital to the kids even though they haven’t even done their GCSEs. It will accelerate massively in the 20s and be done by 30. I just don’t buy the idea that my kids will be irresponsible with money in their 20s but magically become responsible in their 50s. Voting patterns of older demographics show they are just as irresponsible.
Delivering money earlier means the kids know someone has their back. It allows them to do what they want, not what they need. It allows greater risk-taking, which can lead to exponentially better outcomes. The non-linear effects of giving them money earlier are just huge.
Unknown longevity and care costs can be easily solved by just making assisted dying much easier. You should be able to book your check out time years ahead. Quick injection of pentobarbital. Job done. £10k max. Yes, it’s a bit Logan’s Run but I’m interested in quality not quantity. Definately no interest at all in pain and complete loss of dignity.
If IHT is such a great idea why does it only raise £7-10 bn p.a.? Peanuts. Rounding error territory. Gesture politics. Like VAT on school fees. IHT won’t save the day.
Frankly, the last best hope (and greatest existential risk) is developing AGI and humanoid robotics at scale coupled with a full spectrum energy revolution (solar and nuclear) to move from a 20 TW to 1,000 TW civilization (with per capita PPP Gross World Product up ~100x to $1 mn p.a), all carbon free.
China’s well en route now. I’m not sure that we’re even in the roadway (yet).
LLMs, regulation city and welfarism on steroids don’t feel like a winning formula for achieving AGI and hyper growth.
If we can’t manage it, then I think we’re pretty much screwed. Forget even getting to Level 1 on the Kardashev scale. Policy debates about raising SP age, merging IT and NI, wealth taxes / IHT become just so much deck chair rearrangement on the Titanic.
A world with an ever shrinking, ever aging population will over time not just stagnate but become poorer as a smaller productive population is less capable of utilising, maintaining and improving accumulated physical infrastructure and knowledge. It might take many centuries but humanity will fade away, or more accurately gray out, into an aging abyss. I’d recommend reading “After the Spike: Population, Progress, and the Case for People”, by Dean Spears and Michael Geruso for a view into that all too plausible slow acting, shrinking dystopia.
@ZX – no point thinking in general terms about how responsible people are at different ages, you just need to make a specific judgement call for the ZX jnrs – you will know better than anyone what’s best.
It reminds me of the perma-annoying quote from Buffet on gifting kids along the lines of ‘give them enough to do anything but not enough to do nothing’ – which sounds great until you follow it up with ‘ok so how much is that exactly’ at which point it becomes immediately clear that the phrase is pointless.
The downside to gifting is it can destroy drive and ambition, but effects are hugely variable and entirely specific to the individuals in question, do your own homework as they say, as a parent you need a decent crystal ball of emotional intelligence, also you can run mini experiments (or lay financial traps) throughout their childhood to see how they respond to micro-windfalls and tailor plans accordingly.
I tend to look at early gifting as removing financial anchors, or replacing a headwind with a tailwind or some similar mixed metaphors. If you can avoid ever having a mortgage and the additional 10% student rate of income tax, you are essentially flying out of the starting gate in comparison to everyone else.
I think lots of people see building family/dynastic wealth in same way an entrepreneur might view building a business – for many its a very natural kind of past-time/world-view – so for that part of the demographic IHT will always be largely unwelcome. There’s a window of folks with NW in the realm of 2mm to 5mm who get the shaft from IHT, below that you’re not really on the hook, above that, the cost of the advice/admin required not to pay starts to make sense.
@ZX. “… You should be able to book your check out time years ahead. Quick injection of pentobarbital. Job done. £10k max. Yes, it’s a bit Logan’s Run …”.
Or Soylent Green, for those without the £10k…
Hhm.
@TI #18
A long-term care insurance product has been discussed since at least the 90s. The Dilnot review in 2011 proposed a cap of £72k (later increased to £86k) but it was never implemented and Reeves scrapped it last year.
The idea behind the cap was for the state to insure the tail risk (roughly the top 10% of lifetime costs) and a private insurance market or personal wealth to cover the rest.
I meant to add to my previous comment, if you’re intending to gift children early and to a significant level, a certain amount of financial education is also prudent. Otherwise, they may fare no better than an average lottery winner. I imagine ZX is all over this and perfectly positioned to provide such support.
@Lakeland Dreamer #38 > One other idea: why couldn’t there be a tax-efficient way of paying care costs directly out of pension pots?
There is. You can take out a purchased immediate needs annuity through a financial adviser, which is tax-free if paid directly to a CQC-approved care facility
But, Ermine, you still have to pay income tax on withdrawing the money from your pension fund with which to pay for the purchased immediate needs annuity.
Or you can buy a conventional annuity with the pension fund and pay income tax on that.
Whereas the suggestion was to allow the tax-free use of pension capital to buy a care annuity.
@Mathmo (#39)
The premium bond calculator at https://premiumbondsprizes.com/ is useful for calculating the odds of winning given amounts (I have done similar calculations using a monte carlo approach which takes a few minutes and is ‘good enough’ for most purposes and an exact solution which, using parallel code on 8 processors, took about 15-16 hours).
With £50k, over a year the lower and upper deciles (i.e., 10th and 90th) are £1.1k and £2.3k, while holding 50k over 4 years, the deciles are £5.35k and £8.15k – i.e., as expected, the ratio of outcomes narrows with time.
@2 more years (#36)
Without working out the exact probabilities, I think you would need a very large sample of those holding £50k before you could statistically infer with any certainty that the ‘game’ was systematically unfair. I do note that, unusually for a conspiracy theory, it would probably only require a few people to be ‘in on it’ for it to be implemented (but why bother, since excluding bonds before 2000 would only save NS&I roughly 3%, i.e., about £150m from the total prizes of £5 billion).
@Alan S (#48):
I am interested in your Monte Carlo comment. Have you by any chance found a way to simulate fat-tailed distributions that would be amenable to implementation in Excel, not require excessive processing power, and be classed as ‘good enough’?
There is a good moral and social argument for inheritance tax.
No-one sensible believes communism work – everyone having the same.
Equally though, when inequality of wealth is too wide, there are huge problems.
Once a family gets past earning to live and starts accumulating wealth a number of things happen.
Their kids go to better schools, they get better educational support, go to university, get better jobs. All good stuff.
Networks are built, more wealth accumulates, inherited and their kids have even more advantages. Those advantages become embedded.
Affluent, well educated parents advocate for their kids, getting e.g. SEND diagnoses and extra time in exams.
It’s entirely understandable – just Darwinism at work but all this widens wealth inequality and smothers meritocracy. Kids with huge potential don’t get the opportunities, to the detriment of us all.
This is entirely visible in the current situation with younger people these days. You can buy a house if you have inherited/gifted wealth. If not, it’s very difficult.
You can get a good job if your parents have good contacts, much harder if not.
Some inequality is good and drives ambition and effort but too much inequality is bad and can embed mediocrity.
Barn Owl mentioned aristocracy. Around 30% of UK land is still thought to be in the hands of the aristocracy/gentry. Embedded privilege, despite the obvious failings of many members.
They also suggest that we need an ‘abundance’ mentality. This is reminiscent of the ‘trickle down’ theory.
The reality is that wealth is being concentrated in the hands of fewer and fewer people e.g. Musk. The power this gives individuals is horrifying and is a Very Bad Thing TM.
@rhino (#42) (and others)
Re: gifting
FWIW, our approach has been to provide funds for specific outcomes (e.g., helping with the deposit for a house, first car, additional education or training, etc.) together with a monthly drip of funds that amounts to a small portion of their income (<5%) – reasonably in accord with the Buffett quote.
This is not for IHT purposes (since a significant portion of our net worth has been annuitised through DB pensions), but is to provide money at the age they need it.
The real issue is how to get the economy growing again – this tinkering with the pie is just that – tinkering.
Get some real hope in to people that they can build businesses and succeed and will be praised for succeeding not dragged down for being “flash”.
The whole mindset needs to change. The US is often given as an example of this and it is certainly not perfect by any measure but risk-taking and so on are much more lauded in US culture. There is also a high degree of social mobility – the attitude there when someone sees a rich person is ” I could be like that one day”. The attitude here is “look at that flash git”!
I think there was a debate on here or somewhere else about how landlords don’t deserve to make any money – they are just leveraging up to gain wealth they don’t deserve! Well may be they are but the government needs to encourage that kind of mentality in order for the economy to grow.
I don’t know enough about it to comment precisely but I’m not sure why more people don’t learn a trade like plumbing, electrician etc. You get to run your own business, there is always a demand for these services and you can charge whatever you like! Plumbers and electricians must be absolutely minting it given the amount they charge!
@ Alan S – thanks for the premium bond link, I hadn’t seen that site before.
@ Al Cam – you’ll quickly hit the limits of Excel here. Maybe we need a Monevator group for R tips
@Various — I’m not sure if you’re legitimate commenters or not (no offence if you are, the bots are getting ever smarter) but all the comments talking about ‘UHT’ and 1-2 others are making the usual specious argument about IHT.
Your argument is effectively that IHT is a tax on ambition and success and entrepreneurs.
NO. It is the opposite.
I am not saying deploy IHT at a higher rate to take more money from entrepreneurs or to cut down the successful.
It is the complete opposite.
Again, the successful growth and job-creating entrepreneur in this example is DEAD.
I know people don’t like to think about it but that is the reality. Growing a £10m estate (say) doesn’t stop you dying. And this is where the IHT kicks in.
Ironically, the people effectively being taxed here are the heirs — who definitionally did nothing to create the wealth or be successful or contribute to economic growth.
i.e. I am saying tax the unearned wealth more, and tax those actually doing useful work / growing businesses less.
Obviously IHT is not going to replace income tax or capital gains taxes or whatnot. I’m not suggesting that.
Rather, it is about where does the next marginal £1 of tax come from. I say take more of it from the estates of dead people rather than from the pay packets of productive workers or the profits of successful value-adding companies or the capital gains of successful entrepreneurs.
I am explicitly saying encourage economic growth and wealth-creation, at the expense of a marginal pound of getting something from nothing from an inheritance.
I’ve stated this before but I wouldn’t have 100% IHT or anything like that. I’m not completely blind / wilful to the human impulse.
But I would tax beneficiaries hard, above a (to me) generous allowance of say £50,000. Maybe say 80% above that.
Fine, you can get a £50,000 parting gift from people who are now dead and by definition are not being impacted in any way by being taxed from here on. That’s multiples more than most of the population has in savings. And the recipient did *nothing* to get it, so should stop complaining.
Anything more — or whatever is left after those having been given out — tax at 80%.
Or the entrepreneur is welcome to spend/donate it as they see fit in their lifetime. I agree they’ve earned it!
Unlike their kids. 😉
@TI. I actually think IHT actually increases neo-feudalism. If IHT was a genuine threat to the aristocracies wealth, do you think it would still exist? So the fact that it does exist means that it’s no threat to them. Right now, you collect smalls from the people with a few million, but helpfully ensure they never achieve escape velocity in terms of dynastic wealth. Meanwhile, you get nothing from those with billions since it’s all in trusts already. It’s a cunning way to talk redistribution, while actually ensuring the status quo.
So there is no point having IHT while you have the ability to shield vast wealth through trusts and company structures. You need to redefine the whole concept of what constitutes a person’s estate and what a beneficiary is. Basically no trusts and no FICs. Every single £ is owned by a person somewhere. You also probably need to tax capital gains better. Once that is done, you could consider IHT . I suspect though, that if you reform trusts, companies and CGT, you won’t need IHT!
@TI – well said. Though I don’t know why everyone assumes that wealth is the result of entrepreneurship and not just inheritance…and so it goes on.
The link on the various IHT regimes in various countries was interesting. They seemed to be suggesting that a broader base would be beneficial ie lower the threshold significantly from where it is now.
I also enjoyed the Londonist link. I worked on Shaftesbury Avenue in the 80s and spent many a rainy lunchtime in Foyles. When the weather was good we had Soho Square of course…
UHT -my son who is a Deputy Headmaster in a secondary school tells me that the school leavers are indeed moving into trades and apprenticeships
Something with a real job at the end and no student loan/debt round their necks like an albatross
Perhaps the University bubble has burst though whether it will ever go back to my day when only 11+% went …….
xxd09
@dearieme #47
I do not think this is the case where this paid directly to for care needs to a CQC approved provider, otherwise the tax stuff I quoted would be superfluous to requirements. This happened for my mother, through an IFA and was paid by Just (the annuity provider) directly to the RNIB care facility specifically so this was not taxable.
I don’t know what happens when you normally buy an annuity from a SIPP. I didn’t think you have to pay all the tax on the entire lump sum up front, I was under the impression that tax is payable on the annuity as an annual income rather than the transfer into the annuity
@Zxspectrum – I’m not sure UK trusts at least are overall tax reducing if income tax still applies when it’s eventually drawn, better to pay 40% once than 45% + periodic charges. Foreign trusts maybe though. Personally I think people don’t become billionaires through passive investing and are suckers for setups where the tax tail wags the investment dog.
@TI – ultimately the wealthy are more likely to invest & compound supply side, rather than consume, it’d affect inflation at least
@Larsen #56, I fondly remember Any Amount of Books further along Charing Cross. Mrs DH would despair at the bags of books I would come back with when it was their 5 for £4 sale.
@TI #54: don’t you think though that human motivation requires the incentive to be able to pass on wealth to ones children (or, as now, surviving spouse) without the State getting its shovel in there?
Even Deng Xiaoping who, let’s not forget, was a hard line, anti revisionist communist (at least up until embarking on China’s market reforms in 1978/79), said that under socialism everybody will get rich, but some will get rich first.
The desire to accumulate in life and pass it on after death is a very powerful incentiviser to entrepreneurialism, invention and business building, with all of the tech, (other) innovation, employment creation and (with it) the tax revenues which that all brings.
The most powerful force in human affairs is arguably the rule of unintended consequences.
I really think that if we had a truly effective IHT system which raised tens of billions each year then we’d end up poorer overall.
It’s not a one way transmission belt. People react to taxes, especially those which they, wrongly or rightly, perceive as unfair and punative, and they do so in ways which you might not expect.
The trick is to pluck the cockerel’s feathers in a way which avoids it crowing.
@Delta Hedge — It’s a tricky one.
I’ve no kids and I’ve been much more interested in investing and growing my wealth then many of my friends who do have kids. (I’ve also had more opportunity to, for obvious reasons).
But then again I’ve arguably underperformed — and definitely hugely under-earned — compared to my educational background and, ahem, native talents.
Maybe if I’d been set on making a pile to give to my kids then I’d have tried harder, but I doubt it. (I can definitely imagine I’d have stuck on a more conventional career path with dependents, and probably earned more.)
But then that’s just a very anecdotal personal take.
Also, again I’m not proposing you can’t pass anything on etc. But if you’re telling me a few billionaires won’t try to create Succession style wealth and dynasties, well I’ll live. Most of the best contributions from a societal point of view seem to come earlier in their careers / lives anyway, with only a few exceptions. The rest is empire building.
Again, build your empires if you want, subject to competition and other laws. But don’t expect me to go to bat for your kids getting it on a nod.
@ZXSpectrum48K — Well, the aristocracy has been taxed down to size a few times before (e.g. post-War) I believe? But yes, I agree with your central point that just catching more relatively small-sized fish isn’t going to move either the revenue or inequality dials.
I’m presuming in any real-world situation we’d have to tackle several pieces of the picture. I’m also resigned to thinking it might not be possible.
Still, to the earlier Vote TI point, it’d be interesting to see a society more based around rewarding trying-to-haves over already-haves, let alone had-its and their heirs 😉
Remember (not you, readers generally) that I’m proposing lower income taxes, lower capital gains taxes, lower dividend taxes etc. I’m not proposing some kind of leftwing wealth grab per se.
@ermine (46, 58)
When I read your comment #46 I immediately thought the same as dearieme #47, but then saw he had already succinctly countered your assertion.
You and I both have experience of arranging Immediate Needs Annuities for our late mothers and know that they are paid tax-free to CQC-registered providers. In my mother’s case the annuity was bought from her unsheltered capital – I would be very surprised if your situation was different.
Of course you are correct in #58 that a pension annuity bought from a SIPP is taxed on the monthly/annual payments (and not on the lump sum).
However, dearieme’s point is that if you wanted to buy a tax-free Immediate Needs Annuity (rather than a taxable pension annuity) from a SIPP for payments to a CQC-registered care provider, you would first have to withdraw the money as a lump-sum from the SIPP. This lump-sum withdrawal would be taxable, and potentially very heavily so, as it would likely push you into higher tax bands.
If this is incorrect I would be both surprised and delighted. It would be almost unbelievably beneficial to think that I could keep my tax-sheltered SIPP in readiness for future care needs and then buy a tax-free Immediate Needs Annuity with it if/when the time came.
@DavidV, dearieme Fair enough, I must’ve got the wrong end of the stick. My mother had very little pension – she had no SP and relied on my Dad’s DB pension and his equity assets and the sale of the house, so I guess she did not liquidate any signifcant amount of SIPP asset.
Inheritance Tax is charged on the part of your estate that’s above the tax-free threshold which is currently £325,000 (although anything left to a spouse is exempt), plus a residence nil rate band of up to £175,000, which applies when a home is passed to direct descendants. The thresholds mean that an individual can pass on up to £500,000 tax-free and when combined with their spouse, this can be a total figure of £1 million which can be directly passed onto relatives.
Over the last 5 years, around 95% of estates in the UK were not liable for inheritance tax because the value of their estate did not exceed the threshold. Even when pensions become subject to Inheritance Tax from the 2027/28 tax year, it’s still estimated that only 8% of estates will pay. This will amount to well under 1% of GDP, but stopping it would lead to so many negative headlines for the Party in power it’s a non-starter. Avoiding it seems to be a trivial issue for most, which is probably the best way to view IHT – something to avoid, if at all possible.
@ermine,
My understanding of the special tax treatment of INAs from pension pots is the same as yours. Only when paid directly to a registered care provider in a facility or own home and assessed as being necessary. In the event annuitant (or rather the person receiving care) no longer needs that care, payments redirect to them, the tax exemption (always subject to the whims of HMRC) stops, gross payment stream remains the same but is now subject to income tax as if originally purchased as a regular taxable annuity.
Of course, we could both be wrong…
Enjoying these hustings.
TI you need to make your mind up. Are we upping IHT for the next marginal quid in the coffers or is it to cut the core taxes? You’ve said both, I think.
Trouble is it does neither. All of IHT is only worth 1p on income tax (8bn quid). So triple it and you aren’t really moving the needle on freeing up the worker from the crushing weight of Income tax and NI.
You also ignore aspiration at your peril. Those entrepreneurs are motivated at least in part by the idea that they might pass some cash on and you risk pushing them overseas right at the time we need them to keep their lucre here.
The solution must be to reign in expenditure. 313bn spent on welfare, costing 12bn to dish out. Nearly £6k a year each (cf UK state pension at 12k). There has to be a better way.
On the subject of IHT, did any MV guest contributors (thinking Finimus or similar) ever write an article on discretionary trusts? Whenever I’ve looked at them it didn’t seem obvious they would necessarily save you much in the IHT stakes, what with only being able to stash away 325k every 7 years and the 6% charge every ten years. Looked like a right load of admin for questionable return? I *think* it’s even possible to end up worse off?
I think Mathmo and ZX are probably right that IHT is a dead duck for raising any cash for HMRC. The people you need to catch just have too much resource to throw at the problem of not getting caught. It’s just a ‘principle’ tax. If only the whole country had principles, it would raise a dam fortune.
@Al Cam (#49)
Re: Monte Carlo premium bonds
My code was written in matlab (my science and engineering background!) and then converted to octave (an open source matlab lookalike) and starts by generating a vector of the number of bonds that will win prizes (of the order of 5 million in the October 2023 draw, which was the last I looked at) and then for each draw obtains a random array of the same size). My recollection of a run time of 90s was for 10000 simulated draws with parallel processing using matlab, for a single processor (under octave) it was about 1100s. My solution may not be optimum, but I suspect it may be beyond excel (outside of writing some visual basic).
@Mathmo (#64)
Of the £313bn in welfare spending (there is some overlap between categories)
£175 billion goes to pensioners (£146 billion on the state pension)
£141 billion on working age and children (universal credit and non DWP spending)
£75 billion on disabled people with health conditions
It is also worth noting that according to the UK living Standards Review 2025 (published by NIESR)
“The UK has some of the least generous welfare across the OECD: the UK ranks in the middle of OECD countries for welfare spending (as a per cent of GDP) and third lowest for welfare value (per cent of average wages).”
and
“The UK is neither a high wage nor high welfare country […].”
After more than a decade of cuts and austerity, I’m sure further cuts are not trivial to achieve.
However, a discussion of what is really holding back entrepreneurship in the UK (and I don’t think it is as simple as tax rates – we are not heavily taxed compared to our European neighbours and high tax rates in the 1950s and 60s didn’t hold us or the US back) might be useful. For example, I note that about 13% of the UK workforce is self-employed (compared to 8% in 1979) so there is already a core of small businesses. One problem I’ve seen discussed is that these are not then scaled up.
Would IHT be less of an issue is charged at a lower rate but from a lower threshold – say 10% from £100k? Would that raise similar amounts, less, more (due to people not bothering to avoid it?)
I dislike the uneven, unfairness of it. 2 identical families. One the last parent dies at 90 and has had plenty of time to hand the cash over and avoid (reduce) IHT. The other the last parent dies at 70. No chance to avoid IHT.
2 identical sets of kids, 1 gets to lose their parents early and also hand over a wodge of cash to the govt, the other has their parents live to a good age, see grand-children grow etc and also keep their inheritance.
How much of this countries issues just stem from house prices. If we had the extra houses that meant that the cost of a house was the cost of the bricks etc, the labour built and the cost of land (farmland, not precious land that has its cost inflated but being scarce buildable land), how much better off would everyone be?
The problem here is the the old issue of have and have nots. Not everyone has wealthy grandparents. Some Gen-Xers could get a seriously good start (very nice downpayment for their mortgage), others won’t. This creates a wealth divide among younger people as well as across generations.
There’s a good recent review addressing all these points below. One interesting claim is that every £1 of inheritance tax also generates 8p in taxation from the beneficiaries having to work instead.
It’s not sustainable for capital to increasingly accumulate at the top. The solution is either something like an inheritance tax or something uglier.
If you take the American Dream as epitomising the capitalist world view then inheritance tax is fully aligned with capitalism. The originally coiner of the phrase was predominantly focussed on the dream as a social order.
“It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.” – James Adams
Behavioral responses to inheritance taxation – A review of the empirical literature
The whole question here is that some people are disadvantaged because they do not inherit wealth while some, more fortunate people do.
The answer to that is to create a system whereby the people who are not born in to wealth have options to become that wealthy person – a level playing field of opportunity so that all feel they can succeed. They need to feel that it can be achieved by them Then they will be the ones not wanting to pay IHT!
Right, so inheritance is dangerous because it dulls ambition. Leave your children money and they will fail to strive, compound skills, achieve, etc. This idea has been bobbing around here for a while with remarkably little challenge, so let’s assume it’s true.
What’s less clear to me is why this logic apparently stops at the boundary of the welfare state.
If unearned money rots incentives, why does that only apply when the money comes from parents rather than the state? If the receipt of assets weakens ambition, why is long-term, low-conditionality income support (say, I dunno… universal income?) assumed to be motivationally benign, or at least neutral?
Trust funds: create moral hazard.
Benefits: create dignity.
Huh?
@Alan S (#68):
Thanks. Food for thought. However, in this instance not sure I would want to or even really need to go quite that far. Thanks again.
@HS – wouldnt say the idea has met no challenge, there’s several ideas bobbing around, with the obvious other being you should be able to inherit what you want without any state intervention.
It is a fair point you make though, there don’t seem to be any cast iron, general principles in play here.
Possibly the only general agreement is that IHT is mostly impotent as a tool to reduce inequality.
One thing that’s probably different between state welfare and trust funds though is the absolute amounts involved. Former may just lift you out of poverty, the latter more usually propel you to HNWI status.
@hosimpson — I don’t think it’s being ignored. They are related but separate points, but a matter of degree. I haven’t said I’d ban inheritances. I’ve said I’d allow some pretty meaningful amount to be passed on tax-free. (E.g £50,000).
However I think anyone who has lived near the poverty line — or seen friends or family down there — will note that the incentives are rather different when it comes to having electricity for the gas meter or shoes for your kids versus getting a house in a nicer street in Zone 3.
@mathmo — It’s politics, surely I am allowed to claim several inconsistent things at once! 🙂 Seriously though, I don’t think there’s an incompatibility here. Taxes are pretty likely to keep going up in our lifetime, if only in absolute nominal terms, if not rates etc.
So we could be talking the marginal £ from here onwards. For instance, perhaps £10bn more raised in IHT would allow the income tax threshold to be unfrozen a couple of years earlier?
As for welfare/spending cuts, sure who around this website isn’t for that? But even Musk with his chainsaw is widely judged to have made no difference to US spending, and there are even estimates DOGE will cost money in the long run due to the damage wrought by its reckless nature.
Also we’ve ended up dwelling on IHT when my article pointed towards a wider rebalancing from old to young.
For example, we could get rid of the triple-lock pension for a double-lock, and use some of the money saved to invest more in better state education or even some sort of scholarship programme for the bestest/brightest.
I could turn some of the arguments in this thread around to say that a 70-year old pensioner had the good fortune to live through the best era for social mobility ever, with unprecedented wealth-creation opportunities.
In other words, they had their chance to fluff their own retirement nests beyond the minimum for themselves. 😉
@Atalanta (65)
Nobody here is disputing that payments from an Immediate Needs Annuity to a CGC-registered care provider are made free of tax. That, after all, is its unique advantage compared to a Purchased Life Annuity bought from unsheltered funds or a Pension Annuity bought from a pension pot (SIPP or other).
The key question we are discussing is whether it is permitted to buy an Immediate Needs Annuity directly from a pension pot without withdrawing the lump sum premium from the pension and therefore paying tax on the withdrawal.
I (and dearieme #47) don’t believe it is permitted to buy the Immediate Needs Annuity directly from the pension pot (i.e. by-passing the tax on withdrawal), but I would be delighted to be proved wrong. It would certainly help my own planning for financing possible long-term care.
@Mathmo #64, @Alan S #68: might be worth mentioning that of the £75 bn p.a. going on disability related benefits (within the £313 bn p.a. welfare spend) there’s some very questionable claiming going on, to say the least:
https://www.telegraph.co.uk/business/2025/12/16/disability-benefit-claims-linked-adhd-jump-16000-in-year/
I’ve voted Labour previously, and am generally somewhat sympathetic to the case for a social security safety net, but I’m starting to feel that ‘enough is enough’, and that we, the working and tax paying population, are now being taken for a bit of ride. Incidence of ADHD up 4x just since 2019 (as PIP caseloads suggest)? I don’t think so.
With public expenditure at £1.2 tn p.a. maybe it’s time to look at how we’re spending the money before resorting to more tax rises, IHT included?
Okay … though if we accept that there are no general principles, we’re no longer discussing incentives, only the terms under which we’re prepared to suspend them. At that point, like in that old dad joke, we’ve already established who’s who and are just negotiating the price…?
Oddly enough I found myself chatting to a Kenyan immigrant in Docklands today (man of the people walkabout to outflank TI’s political base? No: one of my hobbies is having conversations eavesdropped to train AI).
He is not wealthy; stacks shelves when he wasn’t getting paid to chat to me (and I to him). We spoke for about an hour during which time I wrangled the conversation to IHT. Of course.
It was clear that my correspondent was firmly against any such thing. If a grandparent wants to spend on a cruise or on bettering their grandkids that is up to them, he had decided. I offered that he was being disadvantaged by wealthy people who were inheriting when he was not. That didn’t bother him: he only cared about what he could do for his family.
IHT strikes at aspiration: the desire to work to improve the lot of the next generation: which is why it will be swept aside, hopefully on the advice of an attentive AI.
Well, there’s someone at the DT in favour of IHT:
https://www.telegraph.co.uk/money/tax/inheritance/in-defence-of-inheritance-tax/
Note that by 2030-31 IHT receipts are still less than 1% of government spending (<£15 bn out of c. £1.5 tn). Totally trivial and yet IHT enrages a broad swathe of the electorate. A high political price to pay for a few pennies.
I see IHT going out of the window in a Tory/Reform coalition given that it has such a minimal impact on the public finances for such a popular and populist move in abolishing it.
In a ‘unite the right’ style (coalition of convenience) government commited (as Reform and the Tories are now) to renewed austerianism against a backdrop of as few significant tax cuts as possible (to reassure the bond market); phasing out IHT over the course of a Parliament or raising the threshold from £325k to £2 mn would optically make a lot of sense. So little cost, so great a poll boost.
Re the Sheryl Sandberg book link, I’ve just read Careless People by Sarah Wynn-Williams which I highly recommend.