David Cameron says that millions of families are "at risk" from inheritance tax. But economic theory shows that people do not pass on the full value of their assets.
David Cameron yesterday claimed that families owning properties worth more than £325,000 would be helped by his party’s inheritance tax policy. But leading economic theory shows that people are unlikely to pass on the full value of their assets today to their children.
On the Politics Show yesterday, David Cameron claimed that there were millions of people “at risk” from inheritance tax:
SOPEL: And inheritance tax even though only a couple of thousand estates, 2,000 people would be affected by it, that commitment, policy commitment remains?
CAMERON: We made a commitment for the Parliament. We said how we’re going to pay for it. And lets be clear, the current threshold for inheritance tax is £325,000. There are millions of people in our country who live in homes worth more than that who are at risk from inheritance tax. We think those people – people on middle incomes, people who’ve work hard in their lives – they should not [interruption]. It will be done in a Parliament as we’ve said.
But the life-cycle hypothesis or “intertemporal consumption” economic model predicts that individuals save while they work in order to finance consumption after they retire. This includes realising the value of their property before they die. In January, Fabian Society Research Director Tim Horton wrote to the Telegraph following similar remarks by the Tories:
“The Conservatives’ claim that four million face inheritance tax (report, December 29) is wrong.
“For most households, the value of wealth owned at death will be less than the value they currently hold. Many people use some of their wealth in older age – whether to pay for care or to do things in retirement. So, you cannot use the current distribution of wealth across all households to calculate who will face an inheritance tax liability in future.
“The reality is that only the richest two per cent will pay inheritance tax this year. Even in the boom years, only around five per cent of estates paid the tax.”
The Tory policy would deliver £540,000 savings to the country’s largest estates. The Mirror has shown that “David Cameron and Tory pals will make £7 million from inheritance tax changes if they get elected.” Eighteen members of the shadow cabinet are millionaires.
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