I recently attended a lecture given by Arnold Kling, who is a former Federal Reserve economist on the Board of Governors staff, former senior economist at Freddie Mac, and all-around financial and monetary expert. The...
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- Downton Abbey and Death Taxes
Downton Abbey and Death Taxes
There are no fourth season spoilers in this post.
The fourth season of Downton Abbey started airing in the U.S. this month, set in 1922. A running theme throughout the show is money. As loyal readers know, the Earl of Grantham has only daughters and under traditional English primogeniture, none can inherit the title, the house, or the land. (The house and land aspect of this changed in 1925.) Even the money from his American heiress wife Cora has been wrapped into the estate, and follows the title. (Lord Grantham has already lost his money in a railroad scheme and almost “invested” it with American chap Charles Ponzi. He’s not good with money.) Rising labor costs and declining agricultural rents add to the uncertainty.
Third cousin Matthew becomes the heir by being descended from the younger brother of a previous Earl, and he and Lord Grantham ink a contract to become co-owners of the estate after Matthew bails it out with Reggie Swire’s fortune. Matthew’s marriage to Mary and the birth of their son, as well as his efforts to modernize Downton’s lands and get it making money again, seems to put things on a good course. Then, at the end of season three, he dies.
Taxes loom large. Matthew is co-owner of the estate, so “estate duty” (what we would today call estate tax, death tax, or inheritance tax) are due on his half, and when Lord Grantham dies, estate tax on the other half will be due. Death taxes were introduced in the UK in 1894 at fairly modest 8 percent top rate, but by the period of Season 3 and 4 we’re operating under the Finance Act 1919. Rates were on a sliding scale up to 40 percent on estates exceeding £2 million, with only a tiny £100 exemption (about $8,000 today). Exemptions for amounts given to spouses or charity didn’t come about until 1974, so the full tax is due. (Today, for couples, the UK exempts the first £650,000 in value from inheritance tax; in America, the exemption level stands at $10.68 million. Charitable bequests are mostly exempt as well.) Whether Matthew left a will determines if Mary is co-owner or merely a life tenant.
The real-life Downton Abbey faced these issues. Highclere Castle, where the show is filmed, had to pay £500,000 (about $40 million today) in death duties after the fifth Earl of Carnarvon died in 1923, suggesting an estate valuation of about £1.5 million (about $120 million today). One-third is a pretty hefty tax bite, and led to the dismantling of many English estates as they sold land and possessions to pay the tax bill. Countess Carnarvon held a huge auction of art and jewelry in 1926 to raise enough to keep the house and land intact.
How will Downton pay the bill? Will Lord Grantham do something financially foolish? What will Mary’s role be? Will the experience motivate him to fight for inheritance reform in the House of Lords, which first passed in 1925?
UPDATE: Tax attorney Sam Brunson does some more Season 4 tax calculating, but don't read it if you don't want plot points spoiled.
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