to help you make informed decisions about your wealth

Solving the property puzzle

16 May 2018

The growing proportion of UK wealth tied up in property means your house can easily end up benefiting the Treasury – instead of your children.

The recent TV adaptation of E M Forster’s Howards End was simply the latest in a long line of screen dramas whose plot turns on the contents of a Will. It is little wonder dramatists keep returning to the topic; passing on property to the next generation is rarely straightforward.

The sharp rise in property prices over the past decade has only served to aggravate matters. For many families, their principal residence is likely to be their biggest single asset, and to attract hefty taxes and other charges each time there is a change in ownership. As a result, retirement downsizing can be expensive, and it can be all the harder to release capital for the next generation. “There can be a sense of frustration in many families that what seems a sensible and fair transfer of assets does not add up financially,” says Guy Gittins, head of residential sales at Chestertons, a leading London estate agent “Some couples in their 60s and 70s find themselves trapped in their homes."

The problem is most acute for those families whose property is worth between £2 million and £4 million – typical of the four- and five-bedroom Victorian homes in the affluent suburbs of west London. A couple in their late 60s may want to live in a flat without stairs, but remain in the desirable location they know and love, and do so without sacrificing too much space. Yet a flat in sought-after areas like Barnes or Fulham costs around £1.5 million, meaning that their ‘downsizing dividend’ gets eroded by Stamp Duty Land Tax (SDLT) and fees.1 SDLT for a £1.5 million property is £93,750, while other fees could amount to an additional £45,000.2

Making the right moves

There are ways around the problem, although none of them is ideal. One trend among older couples is to split their home into maisonettes, renting out the half they do not occupy. An alternative is to find an investor who wants to buy a property for rental and is prepared to agree a long-term contract at a market rate that lets them remain in the property. But Chestertons says warns it has become harder to find suitable investors since SDLT rates on buy-to-let properties were changed in 2016. As a result, many owner-occupiers are choosing to sit tight, although some still feel a sense of urgency.

“One of the reasons people feel it is pressing to pass on their home is that they fear the cost of nursing home fees,” says Alison Craggs of Blake Morgan, a firm of solicitors. “But, unfortunately, this is misdirected thinking that can leave you in a worse position.”

Indeed, if you give away your home to avoid it being taken into account in a financial assessment for care home fees, such an act would be treated as ‘deprivation of assets’. The local authority could then calculate your fees as though you still owned the house, leaving you in an even worse position.

There are things a couple can do in their lifetime to help protect against the cost of care home fees. You could make a Will that ring-fences – within a trust – the share of the home belonging to the first partner to die. This means that the share does not pass outright to the surviving spouse and so would not be taken into account if and when they need long-term care.

Avoiding Inheritance Tax is another spur. Craggs counsels that the first step is to find out whether or not you face an Inheritance Tax liability. This is how the sums work: the first £325,000 of an individual’s estate, which is the ‘nil-rate band’, is exempt from tax. In addition, there is a further exemption when you own a home that on your death you leave to a direct descendant: the ‘residence nil rate band’. This is currently £125,000 and will increase incrementally by £25,000 a year, ultimately reaching £175,000 in 2020/21. (However, this is subject to eligibility and, if the home exceeds £2 million, the allowance is tapered.)

As a result, up to £500,000 per individual could be exempt from Inheritance Tax. A couple that owns an estate worth £1 million may therefore not be liable for any Inheritance Tax. But couples with an estate worth more than that may need to plan if they wish to avoid taking a tax hit – and to take expert advice.


Wills and Trusts are not regulated by the Financial Conduct Authority.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

1, February 2018
2, February 2018

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.


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