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ANALYSIS
A TRICKY INHERITANCE
TRANSCRIPT OF A RECORDED
DOCUMENTARY
Presenter: Frances Cairncross
Producer: Chris Bowlby
Editor: Nicola Meyrick
BBC
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Broadcast Date:
Repeat Date:
Tape Number:
Duration:

01.04.04
04.04.04

Taking part in order of appearance:

Martin Weale
Director of the National Institute of Economic and Social
Research
David Willetts
Shadow Secretary of State for Work and Pensions
Stuart White
Fellow of Jesus College, Oxford
Pat Thane
Professor of Institute for Historical Research, London
Will Paxton
Research Fellow at Institute for Public Policy Research
Julia Huber
Researcher at Demos
Ruth Hancock
Professor at University of Leicester

CAIRNCROSS:
Few human desires are stronger than the
longing to leave an inheritance behind. Industrial magnates pass on their
fortunes to their heirs, dukes bequeath their duchies, and generous aunts
remember their nephews and nieces in their wills.
WEALE: People like the idea of leaving things to
their children. Im not a psychologist, but they may feel that its helping
themselves live on before their death.
CAIRNCROSS:
Thats Martin Weale, Director of the
National Institute of Economic and Social Research. Economists take an
interest in inheritance not just as would-be psychologists. Passing on a
bequest is also a way to give the next generation a helping hand. No wonder
the state is also interested in inheritance, and taxes it. The recent budget had
some proposals to make it harder to pass on the family home without paying
inheritance tax. But that raises difficult policy issues. How far should the
state intervene here, and why? David Willetts, the Shadow Secretary of State
for Work and Pensions, takes one view of inheritance; Stuart White, a Fellow
of Jesus College, Oxford, takes another.
WILLETTS:
Inheritance is a healthy thing. It is
part of the thing that motivates many people is a desire to pass something on
to the next generation and particularly their own children or their own
relatives. That is not an ignoble motive.
SEGUE:
WHITE: I think we should start from the baseline
that inheritance is properly socialised and that the presumption is that all
wealth that comes through inheritance, bequest, gift is presumptively there
for social appropriation and redistribution.
CAIRNCROSS:
Stuart White is studying attitudes to
inheritance, as part of a project to reform the way inheritance is taxed and to
look at ways of helping those who dont gain an advantage in life this way.
His radical views show the extent to which some people want government to
be involved here. After all, not everybody receives a bequest, and inherited
wealth seems to some to be a reward simply for having the right parents. But
many more people now receive bequests than ever before in history. For
inheriting is no longer something that happens only to the rich. Pat Thane is a
professor at the Institute for Historical Research in London, and an expert on
the history of old age.

THANE: Theres been a really historically most

unusual change in the last generation, the last thirty years or so above all
with the enormous rise in house prices, so many families that in the past had
almost no assets now have this one hugely important asset which when
parents die is inherited by their children. And so the kinds of battles within
families and tensions about the right to inheritance that we read about in
Victorian novels that were confined to the better off are now spread around
seventy percent of the population and more. That is really a quite new
experience.
CAIRNCROSS:
Its the democratisation of the Victorian
melodrama that were seeing?
THANE: Absolutely, yes. I mean how
melodramatic for how many people is one of the interesting things we dont
really know very much about.
CAIRNCROSS:
What gives special depth to this
melodrama is that it is not merely about family battles, or even about the
search for a sort of immortality. Its often about a home. Its precisely
because about 70% of people over 65 are now homeowners that they have
something worth bequeathing. And although families now rarely live in the
same home for several generations, many people still behave as though they
did. There seems to be a widespread belief that the family home, however
large and valuable, should be preserved intact for the next generation. But
that creates problems for the government. Elderly homeowners typically
have twice as much wealth in bricks and mortar as in financial savings. So
debates about the right policy for inheritance tax, which is levied on what
people leave when they die, quickly run into debates about how to deal with
family homes. Has that always been true? Pat Thane.
THANE: Inheritance tax was introduced in the
late 19th century as a way of increasing government income because income
tax was still very limited. It was levied only on the extremely wealthy. And
of course it annoyed them, but since it didnt affect most of the population it
wasnt the major issue that its since become.
CAIRNCROSS:
So when did the idea that governments
had a duty to try to equalise peoples life chances by taxing inheritance,
when did that idea begin?
THANE: I think that specifically taxing
inheritance as a way of equalising life chances is another extremely recent
notion. And equalising opportunities in other kinds of ways, above all by
improving education and healthcare, have been historically very much more
important through the 20th century and the base of the post-war welfare was
providing those sorts of social benefits rather than concentrating on
inheritance and having financial assets.
CAIRNCROSS:
Of course, by no means everyone who
dies leaves a sufficiently valuable inheritance to be caught in the tax net. The
first 263,000 that people leave is tax-free; all the rest is taxed at 40%. At
present only around one in twenty estates gets hit by inheritance tax.
However, theres a geographical inequity here: the majority of homes in the
South-East of England are now worth more than the inheritance tax
threshold.
Some people argue that inheritance tax should be scrapped. It raises only
2.35 billion pounds a year, little more than 2% of the revenue from income
tax. And it causes much resentment and is paid mainly by those who are not
wealthy or skilful enough to avoid it. Does the National Institutes Martin
Weale think that this evasion undermines the tax?
WEALE: Well inheritance tax does raise some

money, particularly in the current circumstances. Im sure the Chancellor of

the Exchequer thinks that half a loaf is better than no bread. Obviously there
are all sorts of ways in which people can avoid inheritance tax. Giving your
money away while youre still alive is the best way of doing this, and of
course the Queen Mother managed this when she was ninety-four.
CAIRNCROSS:

Should we get rid of inheritance tax?

WEALE: No, I dont think we should get rid of

inheritance tax. We think it reasonable to tax most forms of income, most
forms of money as and when it comes in, and I think the reasons for wanting
to tax most forms of income do also apply to inheritance tax. You could say
perfectly well that the tax should be paid essentially by the recipient rather
than based on the size of the estate, so the multi-millionaire who distributes
her money among a very large number of people would transfer the estate
almost tax free; whereas the person with a smaller estate, who leaves it to
only one person, would find a large tax charge on that estate. Now I think
that would be a perfectly reasonable way of reforming the system.
CAIRNCROSS:
A reform of this sort is being studied
closely by some of the governments tax advisers. Certainly the way we tax
inheritance today isnt very efficient. But changing the tax requires first
agreement on what is right and wrong about inheritance. Is this just an
opportunity to raise money? Or ought government to have a broader policy
on inheritance that taxation helps to drive forward?
As a Tory member of Parliament, David Willetts takes a pragmatic view.
WILLETTS:
Theres a question about the balance of
inheritance tax in this country and obviously theres an increasing grievance,
especially in the South East, as people find that their family home is brought
within inheritance tax, which was probably not intended when the allowances
were first fixed. So there is a strong feeling that in that respect inheritance
tax is too heavy. But there is likely to carry on being some sort of tax on
inheritance. Its an event which is a taxable event.
CAIRNCROSS:
But should it be a taxable event? I
mean if this is an incentive to people to work harder and if its also a tax
thats really for the very rich rather easy to avoid, does it make sense for
government to intervene in the process?
WILLETTS:
Well there clearly are problems with
inheritance tax. I think to abolish it entirely, however, would cause
problems. One of the great issues in the British tax system has always been
the taxation of income as against the taxation of capital, and if it were
possible to pass capital on through inheritance without any tax then that
might create an efficient way of shifting money around that was in practice
much less heavily taxed than his normal income was.
CAIRNCROSS:
So a policy that scrapped inheritance tax
entirely might open new loopholes. But note that David Willetts says nothing
about the need to promote equality. The Tories have long advocated the rise
of a property-owning democracy, and indeed the biggest redistribution of
wealth in the past quarter century was arguably the Conservatives right-tobuy policies, which allowed people to buy their council houses. Some of
these first-generation property owners are now becoming first-generation
inheritance-tax-payers.
The left, not surprisingly, wants much more dramatic change: not an
administrative tidying up, but a real assault on a potential source of
inequality. Will Paxton is a research fellow at the Institute for Public Policy
Research. He is embarking on a study of new ways to address inherited

wealth. Does he want to reduce the amount of money that people can pass on
in their wills?
PAXTON: What we are primarily interested in, and
I think what the centre left and progressives should primarily be interested in,
is not to prevent people from handing on assets and wealth to the next
generation but primarily to ensure that when the next generation do inherit
wealth and assets, they inherit assets and wealth in a more fair and equally
distributive way.
CAIRNCROSS:
But most people want to give chances to
their own children and they want to pass on their house and their wealth to
their own children; they dont want to pass it on to other peoples children.
Why should a government pursue a policy that discourages people from
leaving money to their own children and tries to persuade them to give
money to other people?
PAXTON: Well I mean obviously we have to think
about the balance here between individual preferences and what we think are
objectives for society and, after all, objectives for a whole range of people in
society. So parents on low incomes who arent in a position to hand down
assets or an inheritance to their children want the best for their children as
well. Collectively, as a society, we need to think about trying to balance
those collective goals, helping those parents on low incomes, while at the
same time allowing for the fact that, youre right, parents do have a very
innate, very strong desire to provide for their children, provide the best for
their children.
CAIRNCROSS:
This all sounds reasonable enough, until
one begins to push a little harder. The present government has had a first stab
at giving every child some assets to start off in life through the creation of
socalled baby bonds, which will give 250 to every child at birth, and 500
to those from low-income families, to be invested until the child is 18. Some
want to take this principle much further.
Stuart White of Jesus College Oxford is working with the Institute for Public
Policy Research, looking at how to make such policies acceptable. He is keen
on an idea that was used to justify the invention of the baby bonds: that of a
citizens inheritance. He sets out the underlying rationale in startling
terms.
WHITE: We have the idea that citizenship comes
with rights to education, rights to healthcare. I think its important to
establish the principle that it also comes with a right to capital. The sums
involved at the moment are quite modest and so my view is that having
established the basic principle of a citizens endowment, a citizens
inheritance, the government should now be looking for ways to build on that
principle to increase the value of these accounts.
CAIRNCROSS:

How big should they be?

WHITE: Theres an American political theorist,

Bruce Ackermann, whose ideas influenced a lot of what Ive said. He wrote
a book in 1999 called The Stakeholder Society in which he argued that
every US citizen should receive an $80,000 grant on maturity.
CAIRNCROSS:
We should give every 21 year old, every
18 year old the equivalent of $80,000 - 50,000?
WHITE: I think thats

CAIRNCROSS:

50,000?

WHITE: I think thats an appropriate long-term

target, yes.
CAIRNCROSS:
To give 18 year olds, every 18 year old
in the country 50,000?
WHITE: Well we can argue about the specific
age at which people should get this, we can argue about the specific terms on
which they should get it, so of course in the community of policy thinkers
who are interested in these citizen inheritance ideas theres a lively debate
about whether you should put some kind of restrictions on the use to which
these capital funds can be put.
CAIRNCROSS:
Well, thats a relief. But is it really right
for government to decide who should inherit? Dont people who have
worked and saved all their lives have a right to decide how they bequeath the
fruits of their labour? And, indeed, how do we finance this bonanza?
WHITE: I think we should start from the baseline
that inheritance is properly socialised and that the presumption is that all
wealth that comes through inheritance, bequest, gift is presumptively there
for social appropriation and redistribution.
CAIRNCROSS:
So you mean you might have a 100%
tax? You would support the idea of 100% tax?
WHITE: No, no, Im saying that should be the
baseline and then we should ask how far do we need to move from that
baseline to accommodate legitimate interests that people have in passing
items of wealth onto members of their own family or friends.
CAIRNCROSS:
devising.

This is a communist state that youre

WHITE: I dont think its a communist state

because its only socialising inherited wealth. I would be in favour of a kind
of capital receipts tax where you dont tax the estate of the person who dies;
you tax wealth as it comes to the recipient. I would be for giving everybody
a modest amount of wealth that they could receive over the course of their
lifetime through bequests and gifts. What should that figure be 50
100,000? We can have further discussion about that.emotional
significance. But whatever that ceiling is, anything above that I would then
be for taxing at a progressively higher rate.
CAIRNCROSS:
That exemption may sound a vast
amount of money, but the average detached home today is now worth around
260,000. So politicians may find a radical approach of this kind is hard to
sell to voters. No wonder Number Ten seems to have put the issue on the
back burner for the moment. However, if Labour wins the next election, the
new government may well propose reforms in inheritance tax.
But what about giving young people a wodge of money to help them get a
start in life? Does the Torys David Willetts think that its a good idea to
create a nation of 18-year-old capitalists?
WILLETTS:
Just handing out large amounts of cash
to people on a sort of means tested basis, Im not sure thats particularly
going to solve any problems. And indeed I think theres a widespread belief
that the baby bond when it matures at the age of 18, it might just pay for a
bloody good 18th birthday party, and Im not clear that thats a very

important objective of public policy.

CAIRNCROSS:
Behind much of the debate about using
inheritance tax to finance enhanced baby bonds is an assumption that the
government should play a bigger role in shifting resources from one
generation to another. In fact, this is something thats already happening on a
big scale. But at present, rather than this being a way of handing down the
national inheritance, much of the shift in resources is from the young up
towards the old. The economist Martin Weale.
WEALE: One mechanism is simply the existence
of a national debt. In so far as that is allowed to expand its finance and
current consumption at the expense of current saving, its creating a debt on
which interest has to be paid essentially for the indefinite future. The second
mechanism is the existence of pay as you go pension schemes. These are
transfers from young people to old people, although when the current young
become old they are going to get them, those transfers are going to be paid
by the people who are then young. So its a continuing transfer from the
young to the old. And the third mechanism we have, which I suspect is an
extremely powerful mechanism, is rising house prices, and this transfers very
efficiently resources from young people and those who arent yet born to old
people. People who bought their houses in the 1950s, early 1960s for three
or four thousand pounds can probably now sell them for about 250,000 or
borrow against them to finance their old age, and it is the current young who
are having to pay those much higher prices for housing.
CAIRNCROSS:
So the old do rather well at the moment.
And, as the number of old people grows, it may get harder to persuade voters
to back any policies that benefit the young at the expense of the old, rather
than the other way around. After all, children cant vote and the young often
dont vote. The old vote, but they may use the ballot box to demand higher
pensions than they have paid for. What does Martin Weale think is the
answer?
WEALE: I think in a utopian democracy in which
you could be sure that young people did genuinely take a long-term view,
then in voting on these sorts of long-term issues you would want to give the
young people the lions share of the vote.
CAIRNCROSS:
polls?

And maybe keep the old away from the

WEALE: And possibly on these issues keep the

old, by which I mean people over 40, away from the polls.
CAIRNCROSS:
Thats probably as utopian as Stuart
Whites ideas for taxing inheritance. But financial relations between the
generations are clearly changing, and requiring different structures both
within the family and between families and government. The generation now
moving towards retirement the so-called baby boom generation may have
a different relationship with the young from the one its parents had. Julia
Huber helped to write a recent report by Demos, a left-of-centre think-tank,
on the New Old the generation now in its late forties and its fifties who will
be tomorrows retired folk. How does she think they differ from what one
might call the Old Old?
HUBER: First of all, that generation is probably
going to live even longer. Life expectancy is still increasing, so youll have
a
longer older age in which to use up the resources, which raises questions
would there be anything left for them to pass on to their children. Then there
is a whole question around will they want to pass anything on. Its quite

interesting. From anecdotal evidence, I just last week spoke to a few well
baby boomers in that sense, and they said well I wouldnt want to spend my
money in old age, I want to live kind of a good life and I dont really see the
need of passing anything on to the generations that come after me.
CAIRNCROSS:
Do you think the reason that the baby
boomers seem less interested in passing on their belongings to their children
is because theyre doing such a lot for their children at the moment?
HUBER: Well yes, there is. I mean with the kind
of extended adolescence and kind of education, rising costs of education, I
think there is probably a feeling for baby boomers right now they are paying
for their children for longer and increasing numbers of children are staying at
home for longer as well. And there is also a double pressure because right
now theyre not only caring for their children, but also might already care for
their own elderly parents, so theyre kind of being put under pressure from
both sides.
CAIRNCROSS:
This points to an ambiguity.
Tomorrows old might like to spend all their money on themselves but
actually find themselves passing it on in all sorts of ways. Does historian Pat
Thane think that this generation, sandwiched between demanding parents and
demanding children, really feels less responsibility for the young than
previous generations did?
THANE: My impression is no that they dont, and
they may actually feel more at the moment because of the feeling that
younger people are really quite insecure; that employment is less secure than
it was say for people who are now in their late fifties or sixties, its hard
for
younger people to buy houses, whereas we were the generation who were
able to buy houses quite cheaply. So I think theres actually a continuing
very considerable concern about the younger generation, as there always has
been. I mean I do think that family ties are, and historically have been, much
stronger in this country than many people say.
SEGUE:
WILLETTS:
One of the most important changes is
that its taking longer and longer for young people to become fully
financially independent. There are lots of reasons for this. More and more
people are going into higher education and higher education taking longer
and often now bringing with it large debts, people delaying when they settle
down and marry, which means often that they try cohabitation. Often when
the cohabitation breaks down, they go back to living with their parents. So
now parents find that their children through their twenties often remain a
financial cost for the parents. That is a big change and it means that the
period of financial dependence on your parents goes on for much longer.
CAIRNCROSS:
The phenomenon that David Willetts
identifies, of the grown-up child living at home, has become common in
many countries including Italy, where its widely blamed for the
extraordinary fall in the Italian birth rate. Its a way in which many parents
are passing on a large chunk of their wealth to their children while theyre
still alive. But the parents themselves may well need more resources to keep
them going through old age, especially if life expectancy among older people
continues to rise and the government does little to raise state pensions.
That will mean finding ways to extract the value of the family home, and
abandoning the insistence on passing on its value intact to the next
generation. How do people feel about that proposition? Professor Ruth
Hancock of the University of Leicester is an expert on finance in later life.

He work on long-term care gives her an insight into the uneasy response.
HANCOCK:
If you ask people in surveys do you
think people should have to sell their homes to pay for residential care, most
people respond no. If you say should we pay higher taxes so that the state
provides all long-term care and people dont have to sell their homes, then
the answer is very often no as well.
CAIRNCROSS:
So people just think two things at once,
do they two conflicting things at once?
HANCOCK:
I think part of the problem is that weve
been led to expect too much from homeownership. Weve been led to think
of homeownership as providing us with a roof over our heads in old age, as a
financial asset and as something that we can pass onto our children. And its
actually very hard to make it do all those three things, at least to the full
value of the property.
CAIRNCROSS:
Disentangling these three roles ought to
be possible. But the financial services industry has not so
the problem. Schemes to allow people to take out an annuity
value of the family home have often had a bad reputation in
have remained deeply unpopular. So what does David Willetts
government might do to help?

far helped to solve

against the
the past, and
think that

WILLETTS:
Part of the challenge is to enable people
to carry on living in their house, if they wish, without at the same time
necessarily having to sit on all this equity if there are ways in which they
could draw on it to enjoy a higher standard of living themselves or to pass it
onto their children and grandchildren to help them meet the costs of setting
up home when theyre younger. And this is one of Britains biggest single
failures both of public policy and of the financial services industry that we
have large numbers of people sitting on these very valuable houses and not
really able to enjoy the income that they could generate.
CAIRNCROSS:
One answer to the problem might be to
take a more imaginative approach to the familys role. Research by Jim
Smith of RAND, an American think-tank, finds that parents tend to leave
larger bequests to children who were more involved in caring for them in
their final years. How does Julia Huber think the family fits in here?
HUBER: I mean a lot of family transactions, yes,
are based on some sort of reciprocity and us expecting that we will get
something back at the end of it. And that is I think where maybe policy
makers could come in and help, well with family structures having changed
as much, how we can regulate those transfers or support those transfers in a
different way - that, for instance, a grandparent who is helping his grand
child with education gets a tax break or that a grand child which might help
out with the shopping with their grandparents does get some incentive from
the state. Two thirds of care for older people is currently being provided
within the family, but with the family kind of changing we also need to
incorporate those changes into how we can arrange transfers happening in the
family.
CAIRNCROSS:
Of course, as families grow smaller,
such reciprocity comes under strain. The evidence suggests that its
overwhelmingly daughters who most frequently care for their parents in old
age, although daughters-in-law are also important and sons tend to contribute
financially, more than in practical ways. Is this a case of the wheel turning
full circle? Historian Pat Thane.
THANE: Reasonably common in Europe in

mediaeval times, though quite how common we dont know, is older people
making contracts with the next generation sometimes with relatives,
sometimes with non-relatives perhaps if they had no children whereby they
would say you can inherit all our assets if for the rest of our lives you look
after us. And they would sometimes specify very precisely the rooms where
they would live, the kind of food they would have every year and their other
needs. So theres obviously enormous cares been taken over inheritance,
amongst those who have something to pass on, over many, many centuries.
CAIRNCROSS:
Just as previous generations invented
their own solutions, so changes in inheritance now will have to be part of a
new bargain between the generations, and between the family and the state.
More old people will be wealthier than ever before, but they will also have to
adjust to longer life, to more complex family arrangements and to new
demands from their young. Being able to hand on some money is a satisfying
end to life. But, as anyone who has read those Victorian novels knows, it can
also trigger disputes about whose claims to inherit are strongest. In political
debate, as in the debate within families, it will be hard to ensure that the
assets of the old become a legacy that strengthens society, rather than
breeding disappointment and dissent.

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