For most people their main residence will be one of their main asset classes, if not the main one. Of course, most will not view it that way. That is, not in the same way they view the likes of cash, equities and bonds.
Okay, for most, it will not produce an income (though it will avoid the payment of rent) but its capital value could represent an important sense of security and financial wellbeing. Indeed, there is evidence an increasing house price has a positive effect on consumer confidence and can, as a result, affect the propensity to spend and to take risk with other assets. Furthermore, with a retirement savings gap being a reality for many, the rich seam of wealth in their main residence is something that could be mined.
It must be remembered, however, that security lies at the heart of the British home-owning population and that makes any financial planning involving residences something that should only be done after serious consideration.
Equity release is an obvious option for those wishing to stay in the same property but action should only be taken after very careful consideration involving all of the affected parties and definitely after taking appropriate, experienced financial advice.
Downsizing is another option that many talk about as a means of releasing funds and reducing costs. The problem here, aside from the not inconsiderable cost of moving, is that the new home is often in a more expensive area, meaning that, in theory, the downsizing has meant “up-pricing”.
For those who retain any kind of ownership of a main residence, inheritance tax and estate planning is likely to become a more important subject with age.
Increasing property prices and a frozen nil-rate band do not help matters. But some good news may be on the horizon. It has been reported Treasury minister David Gauke MP has confirmed to Parliament that the new Government will introduce a transferable main residence allowance of £175,000 per individual, in addition to the existing nil-rate band. This will “take the family home out of inheritance tax for all but the richest,” he claims.
It will be interesting to see if we get the necessary additional detail in the forthcoming Budget and second Finance Bill.
Prior to the election there were rumours in the press that the Conservatives were considering proposing an additional main residence nil-rate band. While there was nothing in the Budget, it did make the Conservative manifesto.
Understandably, there is precious little detail currently but from what we do know an additional main residence nil-rate band of £175,000 will be available, in addition to the existing (“any assets”) inheritance tax nil-rate band of £325,000, in circumstances where a family home or other main residence is transferred to a direct descendant of the deceased (presumably including stepchildren and adopted children).
Depending on the circumstances, this could mean the overall IHT threshold would be increased to a total of £1m for married couples and civil partners: i.e. £500,000 each. It is, however, proposed that the main residence nil-rate band would be reduced by £1 for every £2 where the value of the property exceeds £2m.
The cost of the additional nil-rate band will, it seems, be funded by gradually reducing the £40,000 pensions annual allowance for those earning over £150,000 per year. It is proposed that this allowance would reduce by £1 for every £2 of income over £150,000 until it reaches a “floor” of £10,000 at £210,000 of taxable income.
Tony Wickenden is joint managing director of Technical Connection