Friday, October 19, 2007

That 37% figure in full (well, mostly)..

Inspired by Chris Paul and Iain Dale.

With the recent furore over inheritance tax, an oft quoted figure has been that 37% of households are liable for inheritance tax. The have based this on the following calculation from Scottish Widows (link goes to the cache of the now dead http://www.scottishwidows.co.uk/documents/generic/2007_IHT_new_thresholds.pdf).

You Gov surveyed a sample of the population and found that 37% of people had houses worth more than £210,000. It then made an assumption that these people also had assets of at least £94,290.

The following breakdown was assumed:

£80,636 - Life assurance and pension funds
£28,907 - Non Financial Assets
£30,001 - Securities and shares
£41,838 - Currency and deposits
£7,837 - Other assets

Giving a total of £189,219, the £80,636 figure is discounted since Life Assurance and Pensions are not liable for IHT. This leaves £108,583.

Several financial liabilities are assumed, these are:

£0 - Loans secured on dwellings
£9,652 - Other loans
£4,641 - Other liabilities

Giving a total of £14,293. As if by magic, we get £108,583 - £14,293 = £94,290.

The real question is will this 37% of people really have this much non house based wealth. £41K in currency and £30K in shares. Scottish widows figures are from this ONS report (page 86). But these figures are simply summaries. They have assumed a uniform distribution of wealth, if we take a look at another ONS Nugget we can see that most non housing wealth (71%) is owned by the to 10% of people. Meaning that while the top 10% are likely to have additional wealth which take them over the IHT bracket, most of that 37% with houses over £210,000 are not likely to have wealth that pushes them over the limit.

In conclusion, the maths behind the Scottish Widows report makes a lot of assumptions, it is not the best statistical measure to use.

DISCLAIMER: I haven't broken down the maths as much as I'd like, thats because I'm off down the pub

1 comment:

Chris Paul said...

Excellent, this is very useful. You enjoy that drink. Two further points.

1. The fact that someone's house is worth £210,000 is not the same as them having equity in it of £210,000. The idea that the 37th percentile of equity is £210,000 seems unlikely.

2. Scottish Widows have not included other types of houses. Rented from social or private landlords.

The fact that only about one sixth of the figure quoted by the financial institution with an interest in making people think they should have more equity in the sort of schemes they, now there's a coincidence, happen to be selling does show that both they and the Tory party are fibbing.