Normally older homeowners turn to small properties in retirement. Will that still be the case when the new Inheritance Tax band comes in?
One of the biggest announcements in the Summer Budget was a revamp of how property is treated when it comes to Inheritance Tax (IHT).
Chancellor George Osborne introduced a new main residence nil-rate band for IHT. The new rule effectively allows couples to pass up to £1 million of their assets, including the main family home, to their children or grandchildren free of tax..
It sounds like great news and means many families who would have previously had to pay IHT will no longer have to.
But some experts have warned that the tax change may have the unintended consequence of not just dissuading people from downsizing, but tempting them to do the opposite and upsize instead.
How is Inheritance Tax changing?
Currently everyone can pass on £325,000 of assets to beneficiaries tax-free after they die. The new main residence nil-rate band, dubbed the 'family home allowance', will allow property owners to pass on an extra £175,000 tax-free, bringing the total to £500,000 per person or £1 million for couples.
To qualify the property must have been the family home and be left to direct descendants, such as children or grandchildren.
The main residence nil-rate band will be introduced in phases starting in April 2017. It will reach £175,000 by April 2020.
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The appeal of downsizing
Downsizing is usually used to describe pensioners or 'empty nesters' selling a big property and moving somewhere smaller or cheaper.
Equity from the original home can then be used for living expenses, to fund retirement plans or, in many cases, to help children on to the property ladder.
Downsizing works best if you own an expensive property, for example in London or the south east, and relocate to a more affordable region.
But downsizing has always had its downsides. Firstly, moving is expensive and the cost of surveyors, solicitors, and Stamp Duty will eat into the money you make. Secondly, downsize too soon and you will sacrifice any future gains in the value of the property you have sold.
[SPOTLIGHT]But the new main residence nil-rate band presents an additional pitfall for downsizers: it might not be tax efficient.
Will upsizing be a shrewd tax move?
Some people with a particular set of circumstances may not be just re-thinking their downsizing plans, but planning to upsize instead.
Ian Dyall, head of estate planning at financial advisers Towry, has the following example: “Say you live in a modest house worth £200,000, and you have plenty of liquid investable assets set aside. In order to fully utilise the £350,000 upon the death of the second spouse, it may be worth considering ‘upsizing’ a property from existing investments.
“You could then have a property worth £350,000 which can be passed on to children or grandchildren in its entirety, not affecting the remaining two nil rate bands of £650,000, which can represent any other assets held by the couple.”
In other words, the IHT revamp could mean some people look to move into a larger property during retirement, rather than a smaller one, in order to make use of more of the tax-free allowance.
Budget smallprint
That said, it's worth remembering that in the Budget smallprint the Government said it would ensure that those who do decide to downsize their main property will not lose out from the new nil-rate band.
Under the proposals the Government will allow other assets to be ring fenced to make up any shortfall between the new downsized property and the eventual £175,000 main residence nil rate band (or £350,000 for couples). It’s running a consultation on this due to be published next month.
What do you think? Will upsizing become more popular for retirees? Let us know your thoughts in the comments box below.
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