Institute for Fiscal Studies says rising inheritance will hit social mobility. What’s the solution?

With the incomes of young people failing to increase, inheritances they receive are going to play a much larger role in their standard of living as they get older, says a report by the Institute for Fiscal Studies. James Moore reports

Inherited wealth is set to increase inequality, according to the Institute for Fiscal Studies (Getty)

It would be wonderful if all men and women really were created equal, but they’re not. Not really. Inequality is baked in from birth, with a child’s future success depending in large part upon their parents’ income, which feeds through to their health, where they are educated, their ability to access higher eduction and, ultimately, to the jobs they end up in. 

Social mobility is a nice idea in theory, but it’s less common in practice than our leaders like to claim – or did you never wonder why the government front benches are full of plummy-voiced posh boys? 

This brings us to the subject of inheritance which, according to some fascinating research published by the Institute for Fiscal Studies (IFS) today, is becoming increasingly important as an engine of inequality.

Inheritance has been growing rapidly as a share of national income since the 1970s, something the researchers say will continue. 

The incomes of younger generations haven’t been growing much, if at all, in real terms, but the wealth held by older generations has been. 

This means that for those born in the 1980s, average inheritances are expected to amount to 16 per cent of lifetime incomes – almost twice as high as the 9 per cent for those born in the 1960s. 

As a result, living standards are going to be increasingly determined not by what people earn themselves, but by the wealth of their parents and grandparents. 

There are stark variations within that 16 per cent. Inheritances are projected to increase lifetime incomes by 5 per cent, on average, for those with parents in the bottom fifth of the UK’s wealth distribution, but by 29 per cent for those with parents in the top fifth. 

This is having an impact on what people do with their money. The researchers found that people expecting an inheritance save less for their retirement. Not having to prioritise this kind of saving could be very helpful when you consider the nation’s sky-high housing prices and the difficulty people encounter in saving for deposits (though often such things are ponied up by the Bank of Mum and Dad for those with high-income parents, which could be considered an advance on their inheritance). 

David Sturrock, a senior research economist at the IFS, who worked on the report, says the growing importance of inheritance represents “a profound societal shift”, one he warns has “worrying consequences for social mobility”. 

Quite. It’s clear that it’s going to apply the brakes to the latter, further hampering the life chances of those from less fortunate backgrounds – life chances that the pandemic has already squeezed. 

There are two ways to address this. The first is to, in the words of Sturrock, “kick-start income growth for younger generations”. 

But how to do that? Making education and training cheaper and easier to access is one thing that comes to mind. More attention, in particular, needs to be paid to the further-education sector (where I ultimately got my A-levels). It’s often the first port of call for people from disadvantaged backgrounds looking to give themselves a leg-up, a point made to me by Unison general secretary Christina McAnea, another graduate of the sector. 

One way to pay for improving its funding, and for other redistributive efforts, would be to look at inheritance tax. Sturrock says the research should “increase the pressure to rationalise our system of inheritance taxation”.

As things stand, most estates fall below the £325,000 level at which this tax kicks in, although a clear implication of the research is that this is going to change. Trouble is it’s eminently (and legally) avoidable for those with larger bequests, given the right advice.

It’s also unpopular. Partly, I think, this is because of the strong desire among people to “pass something on”. It doesn’t help that right-wingers falsely characterise it as a “death tax”, which it is not. 

If the IFS’s projections are correct, you might more accurately describe it as a “fairness tax”; but until there’s a change of government, I don’t expect there will be much of an effort to reform it, despite the unpleasant implications for society of the report’s findings.