Inheritocracy: We need to talk about the Bank of Mum and Dad
Inheritance, tax and social care are interlinked, and it is time we talked about it, writes generational expert Eliza Filby
In the 1980s, economists at Harvard discovered a connection between expected inheritance and the level of care that adult children gave to their elderly relatives. Rich parents received considerably more phone calls and visits from offspring. Those who received the most attention of all were sick, affluent and had two or more kids competing as beneficiaries.
Let’s assume that this is not how most of us approach elder care, and yet it highlights a fundamental truth that is being lost amid the debate about Labour’s reform of inheritance tax: inheritance and care are inextricably linked. We know we are living through the largest transference of wealth in history as the Baby Boomers pass on trillions of pounds of wealth. But there is a problem here: most of this inheritable capital is in property and vulnerable to being gobbled up by social care costs. People are living longer but with complex medical needs and in an age when the traditional army of family carers – women – can no longer be relied upon to do it. As finance expert Samantha Secomb told me: “[Boomers] will have to use that money. Their millennial daughters… won’t be able to take time off work to do the care and it costs so much, there will be little left to pass on.”
All of this matters, because since the financial crisis we have seen the emergence of an inheritocracy. Trickle-down economics hasn’t been happening much in the economy, but it has within the family. The Bank of Mum and Dad routinely stumps up for adult children – as education funders, deposit lenders, absorbing the financial shocks of their children but also offering a safety net and springboard. Billions in gifts are transferred down the family tree each year, particularly accelerating in the last few months due to fears of what is to come in the next budget. Only four per cent of estates pay inheritance tax, which points to the fact that we have created a system that encourages aggressive tax planning, shifting capital into other tax loopholes, notably grandchildren, the AIM market and even agricultural land.
But that’s some families, and certainly not all. There are many more who cannot release money early and whose wealth is tied up in their property. While 80 per cent of millennials anticipate some kind of inheritance, many may find that this is eaten up by their parents’ social care costs. We have created an inheritance system where parents pay out for their kids’ adulthood but not their own eldercare. One financial advisor told me his client base could be slotted into three camps: those who are saving for care; those who are deliberately whittling down their assets to preserve inheritance and not pay for care; and finally, the majority, with their head in the sand. I also interviewed a series of affluent elderly women to talk about their care plans. One thing stood out: complete denial that it’s something they should think about and anger at the thought that the family home might have to pay for their care.
It was precisely this outrage Theresa May faced when she blundered over the Dementia Tax in 2017. The family home, inheritance and care are highly sensitive issues that politicians have learned to veer away from. May’s successors, Johnson and Sunak, both pledged to deal with the social care crisis and didn’t. There was complete silence about it during the recent election campaign. Meanwhile families are confronted with the brutal truth when the unenviable time comes. Annual care home costs of £56,000 per year – more expensive than Eton – and potentially needed over a number of years. This is impossible for most families to pay without releasing existing savings or assets.
We are, as has often been said, sleepwalking into a care crisis, one which the inheritance economy and the Bank of Mum and Dad are inadvertently making worse. Most Britons believe in the right to inherit, but few are aware of the actualities, complexities and, as Paul Johnson of the Institute for Fiscal Studies has pointed to, the vital challenge in an inheritocracy, which is “to make inheritance matter less”. This question hinges not only on our dependency on the Bank of Mum and Dad, or closing inheritance tax loopholes, but confronting the question none of us want to answer: how do we pay for elder care?
Eliza Filby’s book Inheritocracy: The Bank of Mum and Dad is out on 26 September 2024