David Alexander comment: ‘Trading down’ in golden years helps us live it up
In addition to greatly enhancing personal choice, mass home ownership has given millions of ordinary people the opportunity to pass on a substantial capital asset which in other circumstances would not have existed.
At the same time, successive governments have increasingly benefited from these assets – ie people’s homes – as a cash cow under the rules governing inheritance tax (IHT). At the last count the annual take was £5.2 billion. But government – this time local – just doesn’t wait until you are dead before cashing in on your property. When an individual requires accommodation in a care or nursing home, only when that person’s total assets have dropped to £26,250 does the local council stop using him or her as its own ATM machine.
The issue was back in the news recently when Damian Green, the former deputy Prime Minister, proposed a new funding system whereby people over 40 would contribute more in national insurance to help pay for residential care, if required in the future, and also to allow them greater freedom in securing the type of care they wished to have. This, however, included the caveat that the choice would be funded “perhaps by releasing part of the value of their property”. In other words, no matter what proposal is adopted, owner-occupied homes will continue to be targeted – whichever political party is in power.
Until relatively recently IHT affected only those who owned top-range housing and by implication also other substantial assets (for example, shares and savings). However, two inter-connected events have brought many more households into the IHT net. The threshold at which an estate becomes liable for the tax has remained at £325,000 for ten years, despite the rise in house prices (depressed areas excepted) during that period. This has meant a growth in the number of people who die “asset-rich/cash-poor” and whose inheritors will consequently be affected by IHT. True, when the assets of an estate are passed on to a spouse or civil partner there is no IHT to pay and the threshold then doubles to £650,000. However, this can be complicated in cases involving single parents, remarriages and “second families”, a common occurrence nowadays.
It seems unfair that the government assumes the value of homes has increased by inflation alone and that no allowance is made for the cost, to owners, of repair, maintenance and modernisation – all paid, incidentally, out of taxed income. Yet, the situation can also be alleviated by “trading down” – moving to a smaller or less expensive property. There are lifestyle and financial justifications for this, especially among those whose children have flown the nest and for whom living in a five-bedroom, late Victorian pile is no longer practical. Developers of certain types of flats have responded to this potential market with properties which recreate the feeling of internal space that one associates with larger, older detached homes. This means their owners are still in a position to accommodate family members for overnight or weekend stays but at the same time without the costs of maintenance and upkeep (particularly heating) associated with the previous family home. Significantly too, these developments tend to be located in or close to the new owners’ previous neighbourhoods which means they can still maintain their circle of friends.
And while accommodation of this nature tends to be in the higher-price range, anyone “trading down” from a larger, older but well-maintained villa is likely to release a substantial amount of equity from the transaction.
Of course cash and liquid assets are also taken into account by the authorities when assessing IHT on an estate or the cost of a person’s residential care. However, releasing cash from property means more can be spent on spoiling the grandchildren and generally enjoying one’s “golden years” and less eventually ending up in the hands of the taxman or local authority finance department.
- David Alexander, MD of DJ Alexander