Wealth Inequality

Wealth inequality is by no means exclusive to the UK, however we do have a very high level compared to other developed countries.   Typically, households in the bottom 10% of the population have on average a disposable income of £9,644 after direct taxes.  By contrast the top 10% have net incomes almost 9 times as much (£83,875).  The poorest fifth of society have only 8% of the total income whereas the top fifth have 40%.  Wealth is even more unequally divided than income.  The richest 10% of households hold 45% of all wealth.  The poorest 50% by contrast, own just 8.7%, and the South East has almost twice (184%) the amount of wealth of an average household in Scotland.

The Organisation for Economic Cooperation and Development OECD) has released a report concluding that disparities have increased in recent decades.  Wealth – for example property, savings, share portfolios and pensions – grows and becomes self reinforcing because the rich have more to invest in higher yielding assets, greater financial knowhow and better access to investment advice.

Individuals with more money to invest have more power, influence and opportunities and are able to generate income without having to work.  A key aspect of wealth accumulation is that it operates in a self reinforcing way; wealth begets wealth, the report said. It may be argued that wealth begets more power, which may ultimately beget more wealth.  Overall, this means that in the absence of taxation, wealth inequality will tend to increase.

The eminent economist Thomas Piketty has highlighted the importance of wealth in entrenching inequality.  He has called for a global wealth tax to reduce this inequality and to increase social mobility.  This report from the OECD is partly in response to his comments, and it highlighted that taxing capital income would not do enough to reduce wealth inequality.  It went on to say the answer may lie in higher taxes on inherited wealth.  Inherited wealth is unearned and therefore unfair, the report surmised.

Increased home ownership and rising house prices mean the wealth of younger generations now depends more on how much they inherit, increasing inequality.   By accepting the argument for tougher wealth taxes and proposing inheritance tax as a key measure, the OECD is likely to instigate further dispute in the UK, where the tax is highly unpopular.  There has been a surge in inequality between the generations.  Most married couples can leave up to £850,000 to their direct descendants without paying inheritance tax.  That figure will rise to £1m by 2020 if they own a home worth more than £350,000.

Experts have agreed that the analysis produced by the OECD is very useful as the actual essence of the argument is sensible.   Wealth is much more unequal than income but it is discussed much less.   Politicians across the spectrum recognise that taxing wealth will be necessary, as the so called Baby Boomer generation (born between 2946-1964) retire and need social care.

UK estates paid a record high of £5 billion in inheritance tax last year.  This figure is set to rise especially for people that leave it too late to take action. For help and advice on Inheritance Tax Planning please call us now.