Some British families are hiding at least 35 percent of their inherited wealth, according to new research from the Department of Economic History.
published in the August issue of the newspaper An overview of economic historyuses historical data to identify nearly 10,000 families whose £9bn fortune has been ‘lost’.
This figure may be the tip of the iceberg, as the study only looked at the wealth of a small group of elite families with special backgrounds (1). The paper suggests that this pattern may represent the top one percent of wealthy families and the share of money they hide.
Professor Neil Cummins of LSE’s Department of Economic History used probate records to compare declared wealth at death between 1892 and 1992 with that before and after 1920. After 1920, estate taxes at death were quite high – increasing year after year. from two or three percent to 85 percent for the richest—thus increasing the incentive to hide wealth.
He calculated the expected flow of inherited wealth for these dynasties after 1920 using estimated rates of return for typical asset portfolios of the wealthy, including stocks, bonds, housing stock and cash. In order to estimate the “true” inheritance wealth, the destruction of wealth due to war and death was taken into account.
Professor Cummins found that the declared wealth of some elite dynasties after 1920 was systematically lower than what would be expected from their inherited wealth.
Some of this hidden wealth can be legally held in tax-exempt trusts or given as gifts to individuals or charities before death. Some may be hiding because of illegal tax evasion.
Professor Neil Cummins said, “Even the greatest wealth can be diluted or destroyed by marriage choices, unwise heirs, disastrous investments, betrayal, theft, stupidity and randomness. However, you would have to be very naive to believe that the wealth of these families suddenly declined after 1920, coinciding with the advent of higher inheritance taxes.
“Because I looked at data on unique, albeit rare, surnames, my research cannot accurately estimate the wealth of a particular family. But this gives the lowest estimate of the hidden wealth of all these English dynasties.”
It is well known that the share of wealth held by the top one percent has fallen significantly over the past century due to increased wealth and death taxes on the elite, but research suggests that this “great equalization” effect is largely illusory. The paper suggests that at least 28 percent of the wealth share of this super-rich group can be attributed to hidden wealth.
Although changes in probate records meant Professor Cummins was able to analyze hidden wealth before 1992, he found that this wealth appeared to influence the behavior of these families, increasing their modern spending and living standards.
Wealth-hiding dynasties – independent of their declared wealth – have appeared frequently in the Paradise Papers and other investigations by the International Consortium of Investigative Journalists, according to the 2013-16 Offshore Leaks.
Hidden wealth was found to be associated with post house value in 1999 and attendance at Oxford and Cambridge universities between 1990 and 2016.
Professor Cummins said: “Historically, ‘big data’ can help uncover riches that can only be detected through shadow. Tax authorities can use this method to check the facts of tax evasion of some wealthy families.”