I noted something curious in yesterday's new wealth statistics from the ONS.
Chapter 2 of their report says that in 2008/10 there was a UK stock of net wealth of property and financial assets after offset of associated liabilities (like mortgages) of £4,470 billion.
HMRC for the same period says, based on estates of those dying that the equivalent figure was £3,520 billion.
That's a difference of £950 billion.
Now some, no doubt, is down to our now notorious 100 billionaires in the UK - many of whom are not domiciled here.
And some is no doubt down to assets being hidden in trusts.
But some too is, I am sure just down to assets being hidden by being offshore and by way of misdeclaration for inheritance tax.
What's the cost? Let's assume £250 billion is legitimately due to non-doms. That leaves £700 billion hidden - presumably for reasons of inheritance tax avoidance. Most of that will be owned by older people who are more likely to die - because they will not have passed it on to next generations as yet. So let's assume that one thirtieth of this sum is misdeclared for inheritance tax each year, with tax due at 40% on this sum as all the estates involved will be subject to tax (which at this level of hidden wealth is likely). This then represents a loss of £9 billion a year.
Inheritance tax only collects just over £3 billion a year at present.
This difference could represent tax abuse on an industrial scale.
You can play with the assumptions whichever way you like. You still come up with a massive loss. And that's one reason why we have an unequal UK. And a good reason for a better wealth tax in this country and a competent and well resourced tax authority to enforce it.
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How would you compare this with the emotive term ‘capital flight’ ?
My view, as an armchair economist, is that these latter-day billionaires were never going to invest this missing capital in productive enterprises that generate wealth for us all; their money is directed ino speculative zero-sum games that inflate asset prices, and into the purchase of rents.
In short, it would be less damaging if they had merely hoarded their money, withdrawing it from the real economy to sit and gleam in a vault, overseas or not; capital flight is a loss, but this century’s deployments of capital actively contribute to economic contraction.
Start with the pending takeover of AstraZeneca as an example; capital is to be deployed in purchasing a productive company at an inflated price, so that the wealth-creating activities of research and manufacturing can be closed down after the company is ‘run for cash’ and all value has been mined-out; and the dominant consideration isn’t even the short-ter profit of extracting this value, it’s a tax avoidance scheme to assist Pfizer in depriving the host economies of any share in the resulting profits.
Seriously, this is what passes for an ‘economics’ blog in 2014?
You start with a predetermined conclusion about tax avoidance and then the whole article is about using unsupported assumptions designed purely to reach that predetermined conclusion…
I’m sure your regular readers will lap it up though!
🙁
Evidence based analysis passes for serious blogging these days
Evidence based analysis?!
To recap:
“And some is no doubt…”
“But some too is, I am sure….”
” Let’s assume…”
“…presumably for reasons of…”
“So let’s assume that one thirtieth of this sum is…”
“…is likely…”
So, as I implied, the vast majority of this thread is based on conjecture and assumptions, with those assumptions hardly being independent or neutral, and it clearly ignores any credible assumption that would contradict the pre-determined conclusion.
Can you really not do any better than this…?
If you really think any economics is objective you are either seriously mistaken or are a charlatan for suggesting something you know to be untrue
My work is entirely normative – like all economics, everywhere
I’m not sure that you completely understand what a blog is, Mr Inconvenient. Educated guesstimates such as this are far more rigorous and objective than the vast majority of nonsense spouted on the blogosphere! Blogs are not the place for final words on things but for engendering discussion. Clearly there is an issue here. The figures needn’t be calculated precisely (with what resources, exactly?) in order to demonstrate that much.
Exactly….
I think you misunderstand. No one is expecting exact figures but clearly if these figures are not simply plucked out of the air to try and prove the conclusion he wants to reach, Richard should explain where his estimates come from.
I did…..
One thing I would like to know is when David Cammeron is going to tackle the UK’s £7trillion of personal debt?
Or are we not allowed to talk about this most dangerous position.
There isn’t £7 trn of personal debt
That is definitely a myth
£7trillion of unfunded promises of the state (unfunded public sector pension liabilities and state pension promises).
Richard, if you dispute the figure for private debt quoted above, what is your figure (and where does this come from)?!
That is utterly ludicrous: it ignores the fact that there is future income
There is no future income that belongs against those liabilities. The future income is payment for future liabilities.
You didn’t answer the question about what the correct figure for private debt actually is….
HMRC and the ONS have both provided estimates
They’ll do
Public pensions are paid straight from the contributions of workers to today’s retirees. There are no liabilities.
“The future income is payment for future liabilities.”
If I take out a mortgage to buy a £100,000 over 25 years, don’t I have a unfunded liability that relies on my future income to pay off that unfunded liability over time?
Like I said earlier, public pensions are PAYGO and today’s state and public pensioners are paid straight from the income of NI contributions, hence no liabilities.
As we are not likely to stop paying tax anytime soon, it’s safe to assume money for public benefits is guaranteed.
In the future, we can raise tax, increase employment or raise wages. We would have little difficulty paying for adequate future pensions if an estimated £120 billion wasn’t salted away in tax havens.
Richard,
As much as I enjoy your blog, the leap from an apparent discrepancy in wealth of £950 billion to an inheritance tax shortfall of £9 billion each year is extraordinary by any standards.
You yourself state, “You can play with the assumptions whichever way you like…”
Well, for a start the ONS figures are an estimate and the HMRC figures are an extrapolation. We don’t and are unlikely to ever know the true amounts for net wealth, but it is possible that ONS has overstated net assets and HMRC has understated (or indeed vice versa). Indeed, HMRC indicate that their figures will not include a lot of estates where a Grant of Representation is not required and I speak from personal experience that when my father recently died, as a family we made sure everything was in joint names with my mother prior to his death precisely so we didn’t have to bother with obtaining probate. That could well be the case for a large number of estates, then again it might not. Either way, it is entirely possible the discrepancy could be significantly smaller or larger than the current estimate.
It’s also not clear from the HMRC statistics the extent to which the estates include gifts made in the seven years prior to death that are now chargeable and if so whether those figures are based on the value at the date of the gift or the current market value of the gifted assets. If they are based on the value of the original gift then the HMRC figures may well be understating the current value of net wealth. Also many people make gifts more than seven years prior to death, in which case these won’t show up in the HMRC figures at all, but will be in the ONS figures.
You state that wealth is “hidden in trusts” – no it is not. UK assets in trusts will either be in an individual’s estate for inheritance tax purposes or subject to the relevant property regime inheritance tax charges – see https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/259126/table12-7.pdf. I agree it would be helpful if HMRC could provide clearer indication of the wealth held in trusts, but it’s not necessarily hidden and it is subject to inheritance tax charges.
Why £250 billion for the amount “legitimately” attributable to non-doms? Why not £650 billion or only £150 billion? Is there any basis for your assertion? Maybe the ONS figures exclude non-UK assets held by non-doms altogether, in which case the discrepancy could be even larger – perhaps when we start to get some statistics for the new ATED charge we may have a clearer idea. I think it could £945 billion. I have no basis for this assertion, but what the heck!
Why one-thirtieth? Is this based on any empirical evidence? Again the real position could be better or worst than you portrayed.
Why I’m disappointed, is that there is a real need for a discussion regarding wealth and its distribution and the role of taxation and this blog appears to be a clumsy attempt to justify a wealth tax.
I don’t know whether a wealth tax is the solution, or higher rates of inheritance tax. I personally think we should explore abolishing inheritance tax and making death a CGT event because that would immediately disarm one of the major criticisms of inheritance tax: that there is a potential double tax charge on assets that have been acquired from post-tax income. If we only tax the net gain at death then that would seem fairer, although we’d need to realign CGT rates with income tax. It would also mean we don’t have to worry about the seven year rule because any lifetime transfer would result in a lifetime CGT charge payable in the tax year of the gift. Furthermore, transfers between spouses/civil partners would be covered by the nil gain/loss rule so there would be an effective exemption.
I suspect my idea would be too complicated, but arguably no more than having an annual wealth tax…
Either way, could we have a debate based on ideas and facts rather than spurious assumptions and assertions?
I find you reaction rathe odd. I used contrasting data from HMRC and the ONS – the best sources available – to suggest there could as a result be a problem with tax recovery as HMRC have clearly not found all the wealth the ONS thinks exist and you suggest that inappropriate.
First, HMRC allow for the estates you refer to – and these spouses do after all die in the end – and it would be spurious to count them twice. I see no reason to think they result in mis-stated data.
Gifts seven years before death are I expect rarely reported – I think this a massive source of evasion as their declaration is a matter of honesty – and many will be tempted to forget them
Third, theory and practice on trusts are far removed – shall we get real here? HMRC know remarkably little about trusts in many cases and there is no register of them
As for the non-doms – I now think the real answer is zero in both cases – the assets are not in the UK and are not counted, I suspect, in either survey, and probably correctly so. I was wrong to consider the issue I think after a few hours reflection – I am always too cautious in my estimating.
And one thirtieth – that’s because the ONS shows wealth rises with age and peaks from 55 on – when within thirty years of death, actuarially speaking. Pretty fair, I’d say
So, I accept one error, which would increase the estimate.
Now, what’s the remaining problem? The basis of estimation is at least as good as much that the Treasury probably do, and maybe better, and I had the decency to explain what I did. They don’t
I reject your suggestion of spurious assumptions, completely
Thank you for clarifying a couple of the points – the one-thirtieth does make more sense now and I agree the offshore wealth of non-doms is unlikely to be in either calculation. That said, there is probably a significant amount of UK property owned via offshore structures that currently will be considered excluded property for inheritance tax purposes – hence my comment regarding the statistics from the ATED charge, as these may illuminate the position and help “close the gap”.
With regards to gifts made within the seven years prior to death, I know that if professional executors/personal representatives are involved they will usually go to great length to ascertain what gifts were made in the seven years prior to death – largely because they are on the hook if HMRC subsequently discovers unreported gifts. I suspect there is more gifting of assets than you realise, but since there is no longer a requirement to report capital transfers annually (unless there is a CGT or lifetime inheritance tax charge), it’s going to be one of those unknown variables. Anyway, my point was that gifts made more than seven years prior to death do not have to be reported and so are unlikely to be appear in the HMRC figures, but will be in the ONS calculation.
Trusts do have to be registered with HMRC (Form 41G) for self-assessment, although not if it is a trust with just a pure protection (i.e. life insurance) policy. So, there is a register of sorts, albeit not one in the public domain. As most trusts created since FA2006 (and additions of capital to existing trusts) will fall into the relevant property regime (and so will require an inheritance tax account) the information HMRC will gain regarding trusts will increase over time. Don’t forget, the creation of a trust will usually require the involvement of a lawyer or similar professional adviser and they will often notify HMRC – particularly if they are going to remain involved as professional trustee or adviser.
I agree, there is a gap between the two estimates. It may be owing to tax avoidance/evasion, but it also could be for any number of reasons. It should be investigated further to make sure, for instance, that the ONS isn’t double counting assets or underestimating liabilities and check that HMRC’s methodology is sound.
My overall point is, there are perfectly respectable arguments to be made for reforming existing capital taxes (both CGT and inheritance tax). I’m just suggesting that debate is undertaken without making sensational claims of “industrial scale” tax avoidance based on potentially flawed assumptions.
I take your points on board!
I recognise merit in them
Richard, the ONS data include current annuities, which are not heritable. The estimated value of current annuities is over £200bn.
Interesting…..
OK, noted
But note too they have a figure for chattels of over £1 trillion I have not taken into account – yet….
I’m not sure how much I’d trust the latest ONS figures. For instance, the property wealth figures which make up £3,500 billion of the £4,470 billion figure are self reported. The ONS state that considerably overstates property wealth when compared to other sources such as the land registry, Halifax and the Nationwide. (eg. typically value of Semi detatched house according to Nationwide – £160,000 compared to £205,000 for the ONS.
I’m not doubting that massive amounts of wealth are hidden offshore, but certainly it seems that the self reported nature of the figures push the ONS estimate up considerably. (By around a quarter based on the differences with the other house price sources)
IHT is self reported too
I don’t know why richard puts up with those ridiculous trolls, obviously there is somewhere between £500b and £1500b in undeclared assets inside or outside the uk.
outside the uk in trusts and earning, more than inside and lazy, i’d bet.
a 1.5% return on £950b equates to around £14b a year in omitted taxable income, and tax at 45% equates to about £4b a year [of the tax gap].
I think what you repeatedly show RM is the lack of rigorous tax research in the UK.
You point out broad issues, it’s not fair on you to supply detailed analysis.
I also do my best to fill the gaps
No one else is – including HMRC
We have to ask why