Like apparently pretty much all British drama, Downton Abbey’s central, motivating issue is inheritance. As the series begins, Lord Grantham’s cousin and the cousin’s son have died on the Titanic. Lord Grantham has no sons, and doesn’t want to break the entail on the estate, so he cannot leave his estate or his money to his daughters. Instead, Matthew, a distant cousin, becomes the heir.
By the third season, Matthew and Mary, on of Lord Grantham’s daughters, marry, and the family’s future is saved. Except that, in the Christmas special, just after Mary gives birth to a son, George, Matthew is killed in a car accident.
Season 4: The Tax Season
The first episode of Season 4 aired on Sunday, and it’s clearly going to be a good season. Why? Because we’ve moved from a focus on inheritance to a focus on tax. Yes, one of Season 4′s central plot points looks to be a tax issue.
Specifically, death duties.
We discover that Matthew didn’t have a formal will. Without such a will, apparently the estate would pass to George.[fn1] Before Matthew took his trip to Scotland, though, he drafted a letter to Mary. In that letter, he tells Mary that he intends to write a will when he returns from Scotland, and he intends for her to be his sole heir. Although the letter was not a will, he had it witnessed by two clients and, with its testamentary intent, the family’s attorney says it will function as a will.
How sensible, right? Maybe not. At dinner, after the letter/will is read, Lord Grantham says:
“I’m not sure how sensible it is. If the letter is valid, the estate will have to pay death duties twice before it reaches little George.”
Later, as Mary’s brother-in-law Thomas Branson shows her around the estate, he brings up the death duties:
Tom: “There is one subject we ought to discuss. I know your position isn’t settled, but we should.”
Mary: “Go on.”
Tom: “The death duties. If you are the heir, it won’t change them. There’s no special treatment for widows.”
Mary: “You do not surprise me”
Tom: “Seems odd really, that you have to pay just as much tax as if he’d left it to Mrs. Tiggywinkle down the road. That’s how it works.”
Mary: “So what are we to do?”
Tom: “Your father believes we should sell land and pay it off in one lump.”
So what are these death duties? And how can they possibly motivate an entire season?
Today, the UK tax on estates is called the “Inheritance Tax,”[fn2] while in the U.S. it’s called the “estate tax.” At the time in Britain, though, it was called the “Estate Duty.” Essentially, this death duty is a tax on the estate of a person after he or she dies. When you die, your executor appraises the value of your estate, and pays the taxes due, if any.
So what would the death duties on Downton Abbey have been? It depends on the value of the estate. Movoto estimates that it would have been worth $34.7 million in 1920 (which is roughly the right time period). If, in 1920, one pound were worth about $3.50, the estate would have been worth nearly £10 million. At that value, the estate would have been subject to a marginal tax rate of 40%. Matthew’s estate would have owed taxes of nearly £4 million.
So is that it? Is the government going to take almost 40% of anything I own when I die?
No. Both the U.S. and the UK exempt a certain amount from the estate tax. In 2014 the U.S. estate tax excludes $5.34 million. That is, the estate tax pretends that the first $5.25 million of a decedent‘s estate doesn’t exist. Similarly, the UK exempts an estate’s first £325,000.[fn3]
£325,000 would put a (minor) dent in Mary’s tax bill; while the tax bill would still be significant, the nil rate band would have saved the Matthew’s estate £130,000 in taxes. But that’s the 2013-2014 nil rate band. What was it in 1920?
£100. Meaning the nil rate band reduced the £4 million tax by £40.
All that said, in the U.S., even if Downton were worth $34 million (or $400 million in 2014), there would be no estate tax due. Why? Because the U.S. has an unlimited exemption for transfers to spouses. Because Matthew and Mary were married when he died, then, if they were Americans, the unlimited spousal exemption would kick in and there would be no tax.
It functions differently in the UK. Rather than an unlimited exemption, the UK increases the exemption amount for married couples. Rather than a nil rate band of £325,000, it can be as high as £650,000. In other words, leaving it to his spouse rather than, say, Mrs. Tiggywinkle down the street would save Matthew’s estate £130,000 in 2014.
Unfortunately for Mary and her family, the UK didn’t introduce this increased threshold until October 2007. In 1920, as Tom pointed out, there was no difference between spouses.
Death Duties Twice?
Note that Matthew’s love for Mary, progressive ideals, and lack of forethought in drafting his not-quite-will imposes a significant cost on Downton. If he had left it to his son, it would have only faced one level of 40% Estate Duty. But now it goes through the tax system twice, first when he leaves it to Mary, then again when Mary leaves it to George. By failing to plan, the family may ultimately have to pay somewhere around £8 million, rather than the £4 million it would owe had the estate passed straight to George.[fn4]
So why does Lord Grantham want to sell of some of the land? Because of liquidity issues: just because the family has an estate worth £10 million doesn’t mean it has £4 million cash on hand to pay its tax bill. To raise that cash, then, they have to transform some of the illiquid value they have into liquid assets.
Mary and Tom have another (as of the first episode, unspecified) plans. And it looks like a significant part of season 4 will be convincing Lord Grantham that their plan will be a good idea, then pursuing that plan. And, whatever it is, I look forward to following the family’s tax compliance.[fn5]
[fn1] And Lord Grantham would continue to manage Downton Abbey until George reached, presumably, the age of majority.
[fn2] A slight misnomer, since, as I’ll explain shortly, it isn’t actually a tax on inheritances.
[fn3] Which, charmingly enough, it calls the “nil rate band.”
[fn4] Note that I’m actually fudging this a little bit–apparently, Mary gets half of the estate. I don’t know what happens to the other half. If it goes to George, that half will only face one level of taxation.
[fn5] This whole conundrum, as fun as I find it, is clearly Matthew’s fault. If he had actually bothered writing a will, with an attorney’s advice, he could have been aware of, and perhaps planned around, the tax issue. Which is to say: if you own a £10 million estate, you have no excuse for not having a will.