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UK Inheritance tax

By Dennis Radford
This article is published on: 21st May 2024

21.05.24

Baby boomer homes will have to be sold off in a “fire sale”

I wrote in a recent article about the disadvantages of holding excessive real estate in one’s investment portfolio.  I highlighted a few issues around costs and illiquidity along with more recent poor performance, and the need to hold liquid investments that can be passed down outside of your estate.

I was therefore interested to read, in a recent article in the Daily Telegraph, about the subject of ever increasing Inheritance Tax liabilities being suffered by so called ‘Baby Boomers’.

Referring to the article by Rob White of the Telegraph –
Baby boomer homes will have to be sold off in a “fire sale” as their families are hit by unaffordable inheritance tax bills, wealth experts warn.

Baby boomers will pass on £1.2 trillion in inheritance over the next few decades. But a combination of property values and a lack of preparation could leave their loved ones in financial peril at the very height of their grief.

UK Inheritance tax (IHT) can run into hundreds of thousands of pounds and must be paid within six months of death. Unless the deceased left enough behind in savings, their cash-poor descendants could be unable to afford their own inheritance.

Experts believe this could lead to a flood of homes hitting the market, as the next generation is forced to sell the family silver and take “punitive” loans to pay huge tax bills they were completely unprepared for.

As Britain’s troops came home from the Second World War, expanding the population was probably just a by-product of the first thing on many of their minds. Back home after six years of battle and bloodshed, they were finally reunited with the loved ones they left behind and the lives they’d put on hold. The next three years heralded a birth rate not seen on our shores since the early 1920s. Over a million babies arrived in 1947 alone as the baby boomer generation was set firmly in motion.

Around one in four are thought to be millionaires, while last year estate agent Savills found that over 65s hold around 43% of housing wealth. Their children could inherit £90bn in the next decade alone and there are fears that passing on such substantial estates could lead to unintended consequences, both for those they loved the most and the country as a whole.

UK Inheritance tax

IHT in the UK is now a 40pc “death tax” charge on someone’s estate.

Everyone gets an allowance of £325,000 before anything is due, with the possibility of another £175,000, known as the nil-rate band, if you’re bequeathing a property to your children or grandchildren.

There’s nothing to pay on what you leave to a spouse or civil partner and, even if you’re widowed when you die, your late partner’s allowance can still be used. However, 40pc of anything you inherit above your allowances must go straight to the taxman. Neither allowance has increased since 2020 and they’re both frozen until at least 2028. There were hopes Chancellor Jeremy Hunt would scrap IHT in this year’s Budget, but he didn’t.

As a result, HMRC is already reporting that families handed over a record £7.5bn in IHT last year – an increase of £400m – and forecasts suggest it could rise another £2bn before 2030.

The amount of IHT paid by families is climbing rapidly.

Experts fear this is all combining to create a major problem for the UK housing market.

When someone dies, the executors of a will have to apply for probate to legally deal with the estate. However, it often isn’t granted before IHT becomes due. Although you can pay it with cash from the estate, such as the deceased’s savings, you cannot sell their assets before probate is granted.

This can mean people are not only forced to sell, they’re also pushed into taking expensive, long term loans until completion – all at a time of mourning.

Harry Bell, of wealth managers Charles Stanley, said: “Being an executor is not an easy job and it’s very stressful. Often, they’re the children of the deceased, so they’re already in a fragile and difficult position and are constantly reminded they’ve lost a loved one.”

To add insult to injury, the IHT bill has to be paid within six months and probate usually takes longer than this. This often means money must be borrowed at punitive rates to cover the bill. If there isn’t enough cash in the estate, investments and property will have to be sold to cover the bill. This can be a long process, all while the funds borrowed are accruing more punitive interest.

Chris Rudden, of investment platform Moneyfarm, said: “The average 35-44 year old has less than £7,000 in savings and they’re the first generation that’s poorer than the one before.”

Property prices are generally very high now, particularly in the south, where there are 600,000 properties over £1m. If you’ve suddenly got £100,000 IHT to pay and only £20,000 in the bank, it’s not going to get you very far.”

Many, many estates will have one of these properties, possibly even two, and would be way above the threshold with other assets. A lot of the next generation don’t have the money sitting around to pay the tax, so they may have to sell the assets they’re inheriting.

That will negatively affect house prices, both for those selling and those not. We saw in 2008 and 2009 what falling house prices can do, particularly in the US. Either the Government will change the policy on IHT, or people may have to foot the bill for something they can’t afford.

We could be looking at a property fire sale and the next generation is sleepwalking right into it.

 

Please get in touch if you would like to discuss tax efficient investments that can be left to your loved ones and beneficiaries outside of your taxable estate.

We all need somewhere to live

By Dennis Radford
This article is published on: 6th May 2024

06.05.24

Owning our home is generally considered to be a good idea.

It provides us with creature comforts along with a sense of security, particularly in our retirement years.

Is investing in ‘bricks and mortar’ a good idea?
Perhaps not, if you are selling a UK property whilst resident in Spain, as I am currently.
Apart from capital gains tax considerations and selling costs, a recent BBC News report says:

House prices fall as lenders raise mortgage rates in the UK
House prices fell in April as potential buyers continued to face pressure on affordability, according to Nationwide. The UK’s largest building society said that UK house prices were down by 0.4% compared with the previous month, with the average home costing £261,962 (some 4% below the peak of summer of 2022). The rising cost of borrowing is a key factor behind the recent drop in property values.

Rock-bottom rates long gone
Mark Harris, chief executive of mortgage broker SPF Private Clients, said, “There are likely to be ups and downs in mortgage pricing in the weeks and months ahead, but ultimately borrowers will have to get used to paying more for their mortgages as the days of rock-bottom rates have long gone.”

This is the second consecutive monthly fall in UK house prices, according to Nationwide’s data. Factors influencing regional property prices vary widely across the country, but the national headline figures have been downward. This data is based on the building society’s own mortgage lending, which does not include buyers who purchase homes with cash, or buy-to-let deals. Cash buyers account for about a third of housing sales.

On an annual basis, the pace of house price growth slowed from 1.6% in March to 0.6% in April

You can read the BBC News article in full via this link https://bbc.in/4a0GXfO .

how prices fall

The article highlights the risk of being overexposed to property in your investment portfolio.

Just when you want to cash in, market conditions may not be favourable.

And you cannot usually sell part of a property – it is an all or nothing transaction.

A well-diversified global investment portfolio is a different proposition altogether. It provides access to a range of valuable growth opportunities, it is constructed to ensure your personal risk profile is at the centre of your investment strategy and it can be highly tax efficient for UK expatriates living in Spain.

Please feel free to contact me for more information about this subject or to book a call for an informal chat.