The million dollar be-question: inheritances, gifts, and their implications for generational living standards

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It is becoming increasingly evident that the 20th century promise of generation-on-generation living standards improvements is under threat today. In a range of areas, millennials (born 1981-2000) are falling behind their predecessors at the same age. Nowhere is this reversal of generational progress clearer than in relation to home ownership and wider wealth accumulation. Millennials are currently half as likely to own their own home at age 30 as the baby boomers (born 1946-65) were, and all cohorts born after 1955 are accumulating less wealth than their predecessors at the same age had. Wealth means houses, pensions and financial assets to rely on over lifetimes and particularly in retirement. In this light, the reversal of cohort-on-cohort wealth progress sits at the heart of concerns about the generational living standards divide.

An obvious rejoinder to these concerns is that all the assets held by members of older generations will not disappear at the end of their lives. Those that aren’t used for personal consumption are generally passed down to descendants in the form of inheritances and gifts. Indeed, there are a number of reasons to believe that future intergenerational wealth transfers will provide a major boost to the living standards of today’s younger generations.

The older population’s expectations for leaving bequests suggest that the total value of inheritances is set to double over the next two decades – peaking in 2035 – as the generally high-wealth baby boomers progress through old age. Millennials are most likely to have baby boomers as parents, so they are the group that will increasingly benefit from this coming inheritance boom.

In addition, fast-rising home ownership rates for the baby boomers and the silent generation (born 1926-45) before them mean that, as well as bigger total inheritances each year, a greater share of young people today are likely to benefit from inheritances than did in the past. With home-ownership rates now around 75 per cent among the baby boomers, most millennials might expect to get a share of a parental home eventually.

So inheritances and gifts clearly have a large and important role to play in boosting the wealth of younger generations. But the extent to which wealth transfers down generations within families will address home ownership gaps or affect wealth inequality levels among young adults remain open questions. It is these questions that this report – the 13th for the Intergenerational Commission – seeks to answer. As well as synthesising and updating past research on inheritances and gifts to-date and expectations for the future, we construct a dataset that directly links young adults and their parents in order to assess potential future wealth transfers.

Inheritances and gifts to-date

Hand-in-hand with the growth of wealth in recent decades has come the growth of inheritances – the real value of estates passing on death has more than doubled over the past 20 years. While adults receive bequests from a range of different givers, two-thirds of money inherited flows directly from parents to their children.

  • The relationship of these inheritances to recipients’ income and wealth levels is nuanced:
    We find that in relation to both income and wealth, the incidence and value of inheritances are higher for those with higher economic resources than lower resources. For example, the highest-income fifth of 40-59 year olds inherited nearly three times as much as the bottom 20 per cent did in the two years to 2012-14 – figures of £5,900 and £2,400 per adult in the population respectively. As such, inheritances have to-date increased absolute differences in income and wealth.
  • However, inheritances are more equally spread across the current income and wealth distributions than income and wealth themselves. As a proportion of current incomes, inheritances in the two years to 2012-14 were twice as important for the lowest-income fifth of 40-59 year old as across the rest of the distribution. And as a proportion of the lifetime income of 65-80 year olds, lifetime inheritances were higher for those with the lowest lifetime incomes than in the middle of the lifetime income distribution (the share at the top was highest). So inheritances to-date have played a role in spreading wealth.
  • These effects for the lowest-income, or least-wealthy, households have resulted from a minority getting large sums in inheritances, rather than most low-resource households benefiting from intergenerational wealth transfers in a big way: only 32 per cent of the one-fifth of 65-80 year olds with the lowest lifetime incomes ever received an inheritance. So this wealth-spreading effect of inheritances doesn’t reach the majority of those with low economic resources.
  • The effects of inheritances on relative inequality levels are complex given these factors, as well as any behavioural responses to expecting or getting an inheritance that are hard to capture. Overall, it appears that inheritances have had a negligible or mildly inequality-increasing effect on wealth and lifetime incomes.

Receipt of gifts – the other major form of intergenerational wealth transfer – happens when adults are younger and appears more closely related to expensive life stages and economic need. Due to both a higher likelihood of receiving one and higher average values, gifts are largest for those with the highest incomes. However as a proportion of income they are more than twice as large for the bottom 20 per cent as the top 20 per cent, the result of a minority of low-income households receiving proportionally large gifts. Overall, gift giving shifts the timing of intergenerational wealth transfers compared to inheritances, but doesn’t appear to substantially affect the distribution.

The future of intergenerational wealth transfers

Our dataset directly linking 20-35 year olds (roughly the oldest three-quarters of the millennial generation) to their parents, even when they are no longer living with them, allows us to compare incomes and property wealth levels. This means we can estimate the impact that the future transfer of this property wealth might have on home ownership rates and wealth inequality.

We find evidence supporting the conclusion that future intergenerational wealth transfers will provide a major boost to many young adults’ living standards and wealth accumulation. Past analysis of inheritance expectations has shown that as well as rising overall, the incidence of inheritances may be somewhat more equal in future than it has been to-date for older cohorts. Across all cohorts born between the 1930s and 1970s, expectations (or the actualities) of receiving an inheritance are around 30 percentage points higher in the top fifth of incomes that at the bottom. But coupled with higher expectations across income levels in each successive cohort, this means that the relative difference between expectations for those with high and low incomes is lower in younger cohorts. Strikingly, more than half of the bottom 20 per cent of those born on the 1970s expect to receive (or have already received) an inheritance.

In line with these findings, our new analysis shows that more than half (55 per cent) of the lowest-income 20 per cent of 20-35 year olds have at least one parent with property wealth that they might expect to get a share of one day. This points to a higher incidence of intergenerational wealth transfers for those with low resources in future than in the past. And although absolute per-sibling parental property wealth levels are 3.8 times as high for the highest-income fifth of 20-35 year olds compared to the bottom 20 per cent, they are less unequal than incomes themselves (which are 6.6 times as high at the top as at the bottom).

  • So there are a number of reasons for optimism regarding future intergenerational wealth transfers to today’s young adults. However, these future wealth transfers are no silver bullet for addressing young adults’ much lower home ownership rates and slower wealth accumulation:
    Nearly half (46 per cent) of non-home owning 20-35 year olds have parents who don’t own either, suggesting they may never receive the kind of transfer that would support them to own themselves. By contrast, 83 per cent of millennial home owners have a parent who also owns their own home.
  • Even those who can expect to get a share of parental property wealth will get it far later than is optimal. Because of the challenges of releasing wealth from properties that are being lived in, it’s reasonable to expect that these assets will mainly be passed down in inheritances rather than gifts. Based on their parents’ life expectancies, we estimate that the most common age at which 20-35 year olds inherit will be 61. This means that wealth boosts will come not at the expensive child-rearing stage when a larger home is more necessary, but when they are approaching retirement.
  • While it’s possible they might reduce relative wealth differences by providing a welcome boost to many who have built up little or no wealth, future intergenerational transfers look set to vastly increase absolute wealth gaps between millennials. 20-35 year olds with property wealth of their own of £200,000 or more have average parental property wealth of £195,000 per sibling, while millennials who don’t own their own home have average per-sibling parental property wealth of just £85,000. The immediate transfer of all parental property wealth to children would result in a near-doubling of the absolute difference between the top fifth and bottom fifth of the 20-35 year old gross property wealth distribution. Growing absolute wealth gaps will make it harder still for individuals to earn their way towards being wealthy, as opposed to getting there on the basis of what their parents had.
  • Reforms currently underway mean that inheritance tax will do increasingly little to reduce these absolute gaps in millennials’ property inheritances. The new housing allowance – which once it is fully implemented in 2020 will mean that up to £500,000 per adult can be passed on tax free – could halve the average tax burden on 20-35 year old parental property wealth, if inherited at current levels.
  • ‘Assortative mating’ is likely to amplify these absolute gaps in individuals’ future wealth transfers at the household level. People tend to couple up with those who have similar inheritance expectations to their own. Adults aged under 50 who are in couples and expect to get no inheritance themselves have partners with an average expected future inheritance of £25,000. By contrast, those who themselves expect to inherit more than £500,000 in future have partners with an average expected future inheritance of £190,000.

Intergenerational wealth transfers as a solution to the generational living standards divide?

The conclusions from the analysis in this report are clear. Patterns of intergenerational wealth transfer to-date and expectations that they will be both larger overall and more common for future cohorts suggest that inheritances and gifts will provide a major boost to today’s young adults. However, future intergenerational wealth transfers are by no means the solution to the low home ownership rates and wealth accumulation challenges today’s younger generation faces. Many younger non-home owners look set to get no property inheritance; those who do will likely receive it too late to support them during the expensive family-raising years; and future property wealth transfers are expected to vastly increase absolute wealth gaps.

On this basis, there is a need to assess how policy can support wealth accumulation within younger generations and temper the role of intergenerational family transfers in driving up absolute wealth gaps. Areas for consideration include how the timing of wealth transfers can be brought forward (for example via equity release and downsizing); the redistributive role of inheritance taxation; and the broader ‘social inheritance’ – including infrastructure, national debt and the condition of the environment – that today’s generations bequeath to tomorrow’s.

With the overall value of intergenerational wealth transfers set to grow rapidly over coming decades, now is the right time to be thinking about these issues. As such, forthcoming policy papers for the Intergenerational Commission will consider these and other policy areas in forming recommendations for a renewal of the intergenerational contract in Britain.