Blog Post No. 160
Inheritance Tax Relief, Mortgages Return, Renter Reform Delayed – 16th May Property Bulletin
Inheritance tax downsizing relief
As reported in The Telegraph the rules around inheritance tax (IHT) are often considered draconian and unfair. However, there is one little-used break that lets you cut your IHT liability against your home, even if you no longer own it. Most families don’t realise that by using “downsizing relief,” the value of a previously owned home can be used to offset IHT. The only catch is that the total value of your estate cannot be more than £2.7m.
The inheritance tax threshold, known as the nil-rate band, has been frozen at £325,000 for years, allowing the government to collect record amounts from a tax that was supposed to only catch the rich. That makes it all the more important to understand and make the most of the additional “residence” nil-rate band, sometimes called the “family home allowance.”
Everybody is entitled to the main nil-rate band, and since 2008, on the first death of a married couple, the unused proportion of any relief can transfer to the survivor. This applies whenever the death of the first spouse occurs, even if it was before 1975 when IHT was originally introduced as “capital transfer tax.” For civil partners, the same applies except that the first death must have occurred on or after 5 December 2005, the date the Civil Partnership Act became law in the United Kingdom.
In October 2007, George Osborne promised to raise the IHT threshold to £1m and “take the family home out of inheritance tax.” It didn’t work out like that, but his promise is the reason we now have the family home allowance. The basic principle is that, with some limitations, you can now claim an additional £175,000 nil-rate where you pass your home on to your direct descendants at your death. This includes your children and grandchildren, including a stepchild or foster child.
The property will usually transfer through your will, but it could also apply if a deed of variation is made following death that has this effect. As with the nil-rate band, any unused family home allowance at the first death can also transfer to the surviving spouse, referred to as the “brought forward” allowance.
However, care is required because a transfer of both the nil-rate band and family home allowance has to be claimed within a two-year time limit. The family home allowance applies to the entire estate on death and is not relief on the home itself. It therefore reduces the total IHT liability on death. In addition, the family home allowance is applied first in the calculation, which means that as long as your property is worth more than £350,000 at death, a couple could have combined reliefs up to the £1m promise made by Mr. Osborne.
Despite this general principle, the property does not necessarily have to remain as your home when you die. As long as it has qualified as your home in the past, the relief can still apply. In later years, many people outgrow their homes and need to downsize. In addition, about 15% of those over 85 end their days in care homes. Fortunately, the rules recognize this with “downsizing relief.” This can apply if you owned your home after 7 July 2015 and which you then sold to downsize or to move into a care home.
At your death, you must have sufficient assets that pass to your direct descendants, but helpfully, there is no requirement to demonstrate that these assets arose directly from the sale of your home. The key requirements are that a property must have been your home at some point after 7 July 2015 and was sold before you died. Note that you have to claim downsizing relief; it is not applied automatically.
Reviving UK Housing: The Return of the 100% Mortgage
The Skipton Building Society has recently launched a five-year fixed-rate deal that requires no deposit, also known as the “Track Record mortgage”. While the news has raised some eyebrows, it’s not the same as the no-deposit mortgages that caused the 2008 financial crisis. The maximum amount that can be borrowed is based on the monthly average rent paid for the past six months, and the maximum loan term is 35 years, which increases the amount that could be borrowed.
Despite the tight rules and a high-interest rate of 5.49%, this shows that there is an appetite for financial institutions to lend money, especially when the money is secured against a valuable asset. Additionally, the 35-year mortgage term for first-time buyers is becoming normalized.
While this may not be a gamechanger in the wider housing market, it could lead to other lenders following suit and extending terms, potentially shrinking required deposits. This could threaten a much-needed correction in the housing market, especially if people continue buying at prevailing prices.
Therefore, it’s recommended that potential buyers try to save for at least a 5% deposit before considering this option. While the return of the 100% mortgage may not revive UK housing, it shows a willingness from lenders to facilitate borrowing, which could have wider implications.
The Renters Reform Bill Delayed
The UK government’s Renters’ Reform Bill, has been delayed yet again due to procedural issues. Renters’ Reform Bill that will outlaw ‘no fault’ section 21 evictions, double notice periods for rent increases, and give tenants more power to challenge unjustified increases. Landlords will be able to use grounds such as repeated incidents of rent arrears for repossession and reduce notice periods for anti-social behaviour. The bill also applies the legally binding Decent Homes Standard to the private rental sector for the first time and introduces a new ombudsman for private landlords for disputes to be handled outside of court. While many in the sector have welcomed the bill, some worry about its impact on the buy-to-let sector.
However, according to Polly Neate, CEO at Shelter, renters are in constant fear of eviction with two months’ notice and cannot wait any longer for reform.
The bill was initially promised by former Prime Minister Theresa May in 2019 and was included in Boris Johnson’s party manifesto during the 2019 general election. However, with six different housing ministers since then and pressure from backbench Conservative MPs, the draft legislation has yet to go before parliament for debate. The delay has caused uncertainty in the private rented sector, which is in need of stability and a long-term vision. Goodlord director of insurance Oli Sherlock expressed disappointment over the delay and hopes that the bill will be delivered “shortly.
“Landlords are clearly stretched to the max in some cases, due to the mortgage rate crisis, and even more properties being taken out of tenants hands, by being sold, will create an even greater problem for tenants who are not in a position to buy a property.
Landlords who previously deducted interest fees as a pre-tax expense are now deducting them post tax, pushing many into a loss-making position. This has led to an increase in sales by landlords who own in their personal name rather than a limited company. As interest rates rise, more landlords will fall into this loss-making situation, leading to further reduction in supply and increased rents.
London Super Prime Sales at Pre-Brexit levels
According to recent analysis of Land Registry data by estate agent Knight Frank and data provider LonRes, London saw more than 160 properties worth £10m or more sold in the financial year that ended in March 2023, the highest number since 2016 when Brexit caused the global super-rich to avoid investing in the UK’s “super-prime” market. The combined sum spent on these properties was £3.1bn, averaging just over £19m per sale, an increase from the £2.5bn spent on 144 properties in the previous year.
Despite the ongoing pandemic, the prime London property market has remained stable and predictable in the first four months of 2023, with resilient demand and recovering supply. The number of new prospective buyers registering in Q1 2023 was 42% higher than the five-year average, while new sales instructions were up by 20%. Additionally, the number of offers made was 10% above the five-year average, with exchanges also up 10% between January and March.
While the UK economy is no longer predicted to go into a recession, there are growing concerns over the next UK general election, which could lead to changes in the taxation of wealth and property. As a result, the market is not expected to stay stable in 2024, particularly in higher-value markets where buyers and sellers may be more sensitive to changes in policy. The taxation of wealth and property, as well as the status of non-doms, will come under growing scrutiny, and the number of sales above £10m is expected to decrease by at least 10% next year.
Despite these concerns, Paddy Dring, the global head of prime sales at Knight Frank, remains optimistic. He noted that global buyers still highly regard London despite recent events, and that while super-prime sales are expected to drop by at least 10% over the next 12 months due to fears over the prospects of Labour winning the next general election and fulfilling the party’s pledge to scrap a tax loophole for non-doms, London is likely to remain an attractive destination for investment.
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