Jan 21st 2014
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Think you’ve got tax problems? Compared to the residents of Downton Abbey, you ain’t seen nuthin'. Just in time for this year’s US tax season, we’re treated to a fictional tax problem in the United Kingdom that may make yours pale in comparison. Fictional, but not unrealistic. Fair warning to those of you with a DVR with a Downton backlog, there are lots of SPOILERS AHEAD so unless you want to know exactly what happens, we suggest you stop reading now.
If you’re not familiar with the award-winning PBS series which brings a new, though too-short season about this time every year, you’re in the minority. The opening of Downton Abbey’s fourth season earlier this month broke viewership records. The setting is the British countryside, and follows the lives of aristocratic families and their servants.
From the beginning, the show has carefully incorporated real events from history, like the sinking of the Titanic and the first World War. Downton Abbey depicts life and conditions in the early 1900s, nearly 100 years ago. Yet it manages to touch on an issue that’s real in the United Kingdom and in the United States today among the wealthy.
The last season ended with the untimely death of Matthew Crawley. Through a series of events, Crawley had become the owner of Downton Abbey, a vast estate which was home to generations of his wife’s family, and dozens of servants. The house used to portray Downton Abbey is an actual castle, and the property is rolling green hills, dotted with the homes of tenant farmers who work the land.
At first it was believed that Matthew died without a will, though in a later episode a letter was found, expressing his intention to leave everything to his wife, Mary Crawley. Now Mary and her parents -– Lord and Lady Grantham -- are scrambling to figure out how to pay the death duties (as they are called in England), which could mean selling some of the property, or keeping the land and selling the house. At that time in England there was already speculation that grand estates like Downton Abbey could not survive the economy much longer, let alone surviving the severe slash of death duties.
So that’s the tax dilemma Downton Abbey residents find themselves in.
Estate Tax versus Death Duties
In the United States we grouse about the estate tax, a political hot potato. One side of the aisle wants to tax more and the other side asks why the government is entitled to tax money that’s already been taxed, just because someone died. For one year, 2010, we did manage to extinguish the estate tax completely. For the heirs of those who passed away in that year –- like George Steinbrenner -– that was a windfall.
But the following year, the tax was back. Some fought to lower the federal estate tax exemption to only $1 million, a level not seen since 2001. That would mean the heirs of anyone with an estate of over $1 million would be taxed on the excess. Plus, there was a related effort to push the estate tax rate higher.
Fortunately the exemption was made permanent in 2012 at $5 million, indexed for inflation. For 2014, this means the federal estate tax exemption is $5.34 million, and the estate tax rate is 35 percent. A married couple gets double the exemption, to $10.68 million. And a surviving spouse is able to inherit any amount with triggering a tax, as long as he or she is an American citizen.
Even with this fairly generous exemption, it is not uncommon for small business owners and farmers in the United States to end up selling the inherited assets, just to pay the taxes. There are ways to stretch out the payment for ten or fifteen years, but not without jumping high hurdles.
Now ... back to Downton Abbey.
A Very Different Tax Picture
Mary, the new owner of the Downton Abbey estate does get some benefit as the surviving spouse of the former owner. Say what you will about the dismal state of the US tax system, Mary’s plight would be much rosier here. According to Forbes, when one spouse in England dies today, he or she can leave everything to the surviving spouse, up to a value of £650,000. Here that translates to about $1,062,000. For an individual, the tax-free allowance is half that, £325,000. For estates valued higher than that, the excess is taxed at 40 percent. That is why, according to Forbes, large homes (but far smaller than Downton Abbey) have to be sold just to pay the tax.
Although it would be realistic, it is doubtful Downton Abbey will be sold. That would end a wildly popular show, since it is named for the great house itself. Viewers will have to stay tuned to know the fate of the estate. Too bad it’s not as simple for ordinary folks as it will be for the residents of Downton Abbey ... a mere plot twist.
As egregious as our estate tax system is, compared to the English death duties, it seems much more palatable. Like only having to eat half the poison apple.