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The impact of inheritance on the distribution of wealth: Evidence from the UK
Eleni Karagiannaki
June 2011
Paper No' CASE/148:
Full Paper (pdf)

JEL Classification: D10, D31

Tags: inheritance; wealth; intergenerational transfers; inequality

In this paper we examine how the distribution of wealth has been changing in UK over the period 1995 to 2005 and how the sum of inheritance received between 1996-2004 contributed to the observed trends in wealth accumulation and wealth inequality. Using data from the British Household Panel Survey we find that the period 1995-2005 was a period of substantial growth in net worth and of a substantial decrease in wealth inequality recorded in the survey. The main driver behind both trends was the rise in house prices and the resulting increase in the housing equity of middle wealth-holders. Inheritances received between 1996 and 2004 contributed about 10 to 15 per cent (depending on the capitalisation assumption) of the average household wealth accumulation that occurred during 1995-2005 and somewhere between 26 and 30 per cent of the wealth accumulation of inheriting households (and possibly more if we could account for the rate of returns on early inheritance used by some to finance house purchase). Inheritances were highly unequal and had a positive (but rather small) correlation with pre-inherited wealth. This meant that inherited wealth accounted for part of the observed inequality of net worth in 2005. However, some significant inheritors started with low initial wealth (and this was true within each age group). Inheritance in the period therefore weakened the relationship between non-inherited wealth and the final total. The net effect was therefore that inheritances in the previous decade had a mild equalizing impact on 2005 net worth inequality. However given the small magnitude of these effects and the uncertainty about the behavioural responses to inheritances, inheritance can probably best be seen as maintaining wealth inequalities rather than either narrowing or widening them.