Tonight’s episode of Downton Abbey confirms my suspicion that Season 4 is the tax season. (Apparently, the writers were desperate to snare the tax attorney demographic.) So why is Lord Grantham so set on selling land to pay Matthew’s death duties? We learned tonight, in Episode 2, that other tax considerations have a lot to do with it.
Specifically, he wants to sell land to pay the tax because that appears to be the most tax-efficient way to get the money. In 1920s Britain, the income tax did not apply to capital gains (that is, money received as a result of selling certain types of assets—including land—as opposed to so-called “earned income”).
If, then, the estate sells land worth £2 million,[fn1] it can use that full amount to pay the taxes. If, instead, Mary decides—and convinces her father—not to sell the land, somebody (Lord Grantham? Mary? Thomas?) will have to earn money to pay the taxes. Apparently, in 1918, the standard British income tax rate stood at 30%; assuming that rate applied to whomever earned the money to pay the taxes, he or she would have to earn nearly £2.9 million in pre-tax income in order to have £2 million after income taxes that Matthew’s estate needed to pay the death duties.[fn2]
Still, as I tell my students, tax isn’t the only consideration; a transaction has to make business sense, too. Lady Mary believes that, if they sell enough land to pay the inheritance tax, the family will not have enough income to support the estate. If that’s true, it’s a pretty devastating counterargument to the tax efficiency argument.
Still, since I’m a tax person, right now I’m siding with Lord Grantham. I look forward, though, to seeing where they go from here.
[fn1] Because, as was pointed out to me last week, Matthew only owned—and therefore only bequeathed to Mary—half of the estate.
[fn2] Note that both interest and rent on the land (both of which are types of income that I assume significantly help to support the estate) would fall under the category of earned, as opposed to capital, income.