# Working Paper No December Gifts and inheritances in Ireland

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6 inherited 1000 ( 787) in 1981, to have the same relative consumer purchasing power in 2013, an inheritance would have to be approximately The application of a rate of return works on a similar basis, increasing the value of the gift/inheritance by some assumed rate. In the literature the most commonly used rate is 3%. The HFCS includes data on the year of acquisition, value at acquisition and current value of all owned- HMRs. By adjusting for CPI inflation since the date of acquisition, as described earlier, the original value of the HMR is put in 2013 prices. Comparing the current value to the original value in 2013 prices using the formula below calculates the Real Rate Of Return (RROR aka Compound Annual Growth Rate) on owned-hmrs that was realised. 1 CCCCCCCCCCCCCC VVVVllllll HHHHHH RRRRRRRR = OOOOOOOOOOOOOOOO VVVVVVVVVV HHHHHH iiii PPPP YYYYYYYY oooo AAAAAAAAAAAAAAAAAAAA 1 The underlying assumption here is that the recipient invested (or could have invested) the value of the bequest and achieved an assured rate of return on it. While it appears reasonable to assume that all households could have invested in a relatively secure fund and achieved fixed returns, it is clear that they do not. This can most readily be seen by looking at the actual range of returns on assets that were inherited and subsequently held. This information is available for the Household Main Residence (HMR), where owned, in the HFCS and is presented in Figure 2. Sorting the RRORs from smallest to largest, the chart plots the distribution of RROR for all HMRs (blue line) and for inherited or gifted HMRs (orange line). This figure shows that the tenth percentile of gifted/inherited HMR RRORs is about -7.5%, meaning that ten percent of homeowners in the survey lost more than 7.5% per annum on their HMR up to 2013 in real terms. The median (fiftieth percentile) RROR for HMR inheriting households was 0.5%, and it was 6% for the 90th percentile. The pattern of RRORs for gifted/inherited HMRs broadly tracks that of all HMRs. 15% Figure 2: Distribution of Real Rates of Return on HMR from Acquisition to % Real Rate of Return 5% 0% -5% -10% All Owned HMRs Gifted/Inherited HMRs 3% RROR Standard Assumption -15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentile of RROR on HMR 6

8 Table 1: Proportion of Missing Observations by Wealth Decile Gifts/Inheritances Households who received a gift/inheritance Net Assets Decile Proportion Missing Original Value Proportion with Original Value Proportion missing one or more original value Proportion with all original values 1 4% 96% 5% 95% 2 1% 99% 2% 98% 3 6% 94% 6% 94% 4 15% 85% 15% 85% 5 21% 79% 25% 75% 6 22% 78% 24% 76% 7 21% 79% 21% 79% 8 18% 82% 18% 82% 9 24% 76% 27% 73% 10 25% 75% 33% 67% All 21% 79% 23% 77% Bearing in mind the caveats just highlighted, when all wealth transfers for which the necessary details are available are put into present value (CPI 2013) prices, the pattern of the value of gifts and inheritances by year and type can be seen in Figure 3. This is the counterpart of Figure 1 which dealt with the number of wealth transfers. 7% Figure 3: Proportion of Estimated Gifts/Inheritances Present Value (CPI 2013) by Year and Type 6% % of Total CPI 2013 Value of all Wealth Transfers 5% 4% 3% 2% HMR Dwelling Business/Farms Money Land 1% 0% Pre Any Other 8