Inheritances are the £100 billion elephant in the room in talk of British decline

Is Britain in decline?

2023 is looking bleak for the UK economy. According to the recent IMF forecast, it will be the only major economy in recession this year. They pointed the finger at relatively short-term problems: inflation, energy prices and people leaving work post-pandemic.

In response, though, some also pointed a finger at the UK’s longer-term national stagnation.  After over a decade of flatlined wages, increasingly unaffordable housing and crumbling public services, there is a pervading sense that we are a country in long-term decline. And people are increasingly talking about it.

It’s not surprising then that younger people often feel hard done by; that they missed out on faster wage growth, high homeownership, and shorter NHS waiting lists in the late 90s and early 2000s.

Yet, while many young people are undeniably feeling the brunt of our economic stagnation, some will still get to enjoy the riches amassed in earlier decades.

Why? Because unlike economic growth, wealth can be passed down through generations, and that’s happening on a vast scale.

It’s something we at Demos are calling the UK’s new age of inheritance.

A story of wealth and inheritance

The story of wealth in the UK over the last century has seen some significant twists and turns. While a third of UK households owned their home in 1950, by the mid-1990s that figure had doubled. Then house prices began to soar. This means that someone who first bought a house in 1997 paid £49,000 on average. But taking the average rise in house prices since, by 2022 it would be worth £172,000 more. People have also seen huge increases in the value of their private pensions in the past 15 years – even as wages have stagnated – primarily driven by a surge in the price of financial assets.

Given these changes, the value of household wealth in the UK has grown to eight times the size of our GDP, and it’s now being passed to the next generation. The real value of inheritances transferred annually in the UK has doubled roughly every 20 years since 1979. It’s now worth over £100 billion each year – a number that will continue to rise.

So while there is an important story to be told around decline in the UK, there is a wider story about some people simultaneously being pulled up by inherited wealth.

A lifeboat for some…

As the national economy runs out of fuel, inheritance is providing the ‘will-haves’ with an economic lifeboat. Here are three examples of how that will help them:

First, as many people struggle with financial insecurity, inheritances give some an enormous financial safety net. Around half of UK households have less than a month’s income in savings. But those led by people currently in their late 40s are expected to inherit, throughout their lifetime, an amount worth 96 times their average monthly earnings (eight years’ worth), and some will get much more than that. This will transform these people’s finances, allowing them to boost their savings, reduce debts, consume more freely and potentially even retire early.

Second, as people find it harder to get on the housing ladder by saving their income, inheritances may help. In 1997, houses in England and Wales cost around 3.5 times average earnings. By 2020, this had increased to over 9 times average earnings, and even more in London. It’s little surprise then that over a quarter of first-time buyers benefit from financial help from friends and family, with some polls suggesting over 60% of first-time buyers under 35 receive such help.

Third, while the vast majority of people pay tax on their earnings, the vast majority of inheritors won’t pay any tax on their inheritance. A typical household born in the 1980s is expected to get 12% of their lifetime income from inheritance, up to 22% for those from the wealthiest backgrounds. But for every hundred deaths, 96 don’t involve any inheritance tax being paid. Meanwhile, the tax on any capital gains (income people get as a result of increased asset prices) is only required on gains occurring after the inheritor receives the assets. So for the person who bought their first house in 1997 and passed it on as inheritance last year, the £172,000 gain will never be taxed. With our government at the moment struggling to raise the funds needed in public services, the growing value of inheritance in the UK becomes increasingly relevant.

…but not others

Unfortunately, not everyone will be getting on the lifeboat offered by the new age of inheritance. Far from it. IFS modelling of people in England born in the 1980s suggests that, while the top 25% of inheritors will receive over £284,000 throughout their lives, the bottom 25% will receive less than £30,000. The bottom 10% will inherit less than £850.

It means we will see a growing divide between the inheritance ‘will-haves’ and ‘won’t haves’. And, as our research shows, the former group will disproportionately be those with high-incomes, university education, white ethnicity and who live in the South of England – entrenching already existing divides. The latter group – the won’t-haves – will be left on the stagnant ship.

We need to start talking about this

British declinism looks here to stay. As the economy shrinks this year, people will continue to talk about the long-term pressure on living standards, housing and public services – and rightly so. But alongside that, a huge amount of wealth is being passed on to some in our society, and whether or not you benefit will define your experience of Britain’s decline.

Inheritance is the elephant in the room; we need to start talking about it.