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Middle Classes In Real Trouble?

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Earlier today I had the opportunity to drive through one of my old stomping grounds which I have seen less and less of in the past few years - the 'leafy' suburb back streets of Finchley up to Totteridge in NW London. Mrs Thatchers old constituency area in parts.

This has always been a traditionally moderately affluent area.

Last time there was just 2 years ago. I am in shock at the VAST number of To Let signs outside otherwise normal residential family houses (i.e those not converted into separate upstairs and downstairs flats). Those signs were definitely not there last time I drove through the area.

IF this is the middle class struggling to pay their mortgages or deal with debts in general, then to take this step means they must be one step short of selling the family silver to need to do this - and they are hanging on by their proverbial fingernails.

This recession really is going to be an economic blood bath before it is over!

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Old people. They get rich, grow old then die. Leaving a house that would make the tax man cometh in righteous fury if the inheritors sold. So they take out a mortgage on it and rent it out to cover the interest on this "free" loan. This is tax avoidance at its most elegant for your average prole. At some point in the distant future they move in having sold their last place tax free as their primary residence.

I propose you are seeing demographics in action.

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Says to me that either the OO has or is trying to STR, or the main breadwinner in the household has had to relocate outside sane commuting distance and can't or won't sell.

Agreed - both scenarios are a precursor to more serious trouble.

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Old people. They get rich, grow old then die. Leaving a house that would make the tax man cometh in righteous fury if the inheritors sold. So they take out a mortgage on it and rent it out to cover the interest on this "free" loan. This is tax avoidance at its most elegant for your average prole. At some point in the distant future they move in having sold their last place tax free as their primary residence.

I propose you are seeing demographics in action.

Fascinating. Shows how thick I am when it comes to matters financial to not have thought of that wheeze. As and when and if I am lucky enough to inherit anything above inhertitance tax thresholds, I'll remember this as an option.

However, unless there has been a huge die off of elderly house owning folk in that area, I still think it likely that the sea (indeed, ocean!) of To Let signs outside family houses is indicative of greater financial stress then 2 years ago for sure.

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Old people. They get rich, grow old then die. Leaving a house that would make the tax man cometh in righteous fury if the inheritors sold. So they take out a mortgage on it and rent it out to cover the interest on this "free" loan. This is tax avoidance at its most elegant for your average prole. At some point in the distant future they move in having sold their last place tax free as their primary residence.

I propose you are seeing demographics in action.

You pay inheritance tax on the value of the property whether you sell it or not.

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Says to me that either the OO has or is trying to STR, or the main breadwinner in the household has had to relocate outside sane commuting distance and can't or won't sell.

Agreed - both scenarios are a precursor to more serious trouble.

Plus all that mewing for the de rigueur French shack for those that didn't buy early.

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Old people. They get rich, grow old then die. Leaving a house that would make the tax man cometh in righteous fury if the inheritors sold. So they take out a mortgage on it and rent it out to cover the interest on this "free" loan. This is tax avoidance at its most elegant for your average prole. At some point in the distant future they move in having sold their last place tax free as their primary residence.

I propose you are seeing demographics in action.

I might be missing something here - but how would this avoid inheritance tax?

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I spoke to an EA in Swansea today who said that 30% of his letting properties are from people who cannot sell and who are hoping that the market - i.e. prices - will rise again so they can sell.

He told me that things have quietened down now since Easter and they were hoping for a pick up in the Spring of 2010 saying that once Sept comes this year they expect things to start going back down again.

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You pay inheritance tax on the value of the property whether you sell it or not.

If you don't sell, you do have the option to pay the tax by installements. I think that its 10% every 6 months although I am not sure of this. I suppose that if somone in that situatuion believed that prices were going to turn around next year, they would ty to hold on & benefit from the incereased prices.

e.g. Pay inheritance tax on the value of the house now (say 330K) & then sell next year for the more (say 360k) thus providing 30k tax free.

Of course its entirely possible (overwhelmingly likely in my view) that prices will go the other way. In which case they would pay inheritance tax on 330K & only sell for around 270.

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If you don't sell, you do have the option to pay the tax by installements. I think that its 10% every 6 months although I am not sure of this. I suppose that if somone in that situatuion believed that prices were going to turn around next year, they would ty to hold on & benefit from the incereased prices.

e.g. Pay inheritance tax on the value of the house now (say 330K) & then sell next year for the more (say 360k) thus providing 30k tax free.

Of course its entirely possible (overwhelmingly likely in my view) that prices will go the other way. In which case they would pay inheritance tax on 330K & only sell for around 270.

Not sure that's correct either. Surely the 30K would be subject to CGT as it's not your main residence? The 330K benchmark would be capital value established as the "purchase price" that's all. Hey I may be wrong but your scenario sounds too simplistic and flawed IMHO.

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Not sure that's correct either. Surely the 30K would be subject to CGT as it's not your main residence? The 330K benchmark would be capital value established as the "purchase price" that's all. Hey I may be wrong but your scenario sounds too simplistic and flawed IMHO.

Good point. I hadn't thought of that, although I'm not sure if CGT could be levied on a gain from a notional value.

I'm inclined to believe that you are right & its more likely than not that HRRC would.

I guess that you could try living in it for a time & renting out your own house & then claiming that the inherited property was your main residence.

Having said all of that, it is speculation that inheritance tax is part of the equation in these cases. I have seen quite a few people who refuse to believe that their house could possibly have devalued & rather than sell for what they can get, are contemplating renting it out until "things get back to normal".

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I spoke to an EA in Swansea today who said that 30% of his letting properties are from people who cannot sell and who are hoping that the market - i.e. prices - will rise again so they can sell.

He told me that things have quietened down now since Easter and they were hoping for a pick up in the Spring of 2010 saying that once Sept comes this year they expect things to start going back down again.

Wow, an EA that talks sense.

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You pay inheritance tax on the value of the property whether you sell it or not.

Aye, but by taking out a mortgage on the property that is then affordable - and with a bit of luck more than covered by the rent, then it is still a net asset.

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I am in shock at the VAST number of To Let signs outside otherwise normal residential family houses (i.e those not converted into separate upstairs and downstairs flats). Those signs were definitely not there last time I drove through the area.

IF this is the middle class struggling to pay their mortgages ...This recession really is going to be an economic blood bath before it is over!

I'm not sure it is. I bet it's people who want to move and don't want to sell "at the bottom" and so are renting out until it "all blows over"

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I'm not sure it is. I bet it's people who want to move and don't want to sell "at the bottom" and so are renting out until it "all blows over"

Perhaps a classic case of extrapolating the past into the future. Remembering the 1989-1994 crash and then seeing the market 'come back', they assume the present 'crash' will be the same. Will the past repeat or will it be something that surprises them?

With regards to the comments re: Inheritance Tax made by others...... Is this tax like CGT in the sense that, at the time of dealing with an inherited estate, it is the onus of the beneficiary to notify HMRC ? If so, presumably like our MPs, one could 'forget' to do so - and gamble that HMRC never find out (at least as long as you yourself are alive!) ??

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You don't pay inheritance tax below a certain threshold.

The amount above the threshold you pay off by remortgaging the inherited property and getting a renter to pay the interest. (plus some more for a nice car/holiday and frivolity..go on treat yourself etc)

Unless l am much mistaken, you would then pay full capital gains on the house should you sell with no lower threshold. (Perhaps someone could clarify this?) The trick is to sell primary...move into the inherited house then sell that after X years thus avoiding CGT entirely as it would have become your primary residence.

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If you don't sell, you do have the option to pay the tax by installements. I think that its 10% every 6 months although I am not sure of this. I suppose that if somone in that situatuion believed that prices were going to turn around next year, they would ty to hold on & benefit from the incereased prices.

e.g. Pay inheritance tax on the value of the house now (say 330K) & then sell next year for the more (say 360k) thus providing 30k tax free.

Of course its entirely possible (overwhelmingly likely in my view) that prices will go the other way. In which case they would pay inheritance tax on 330K & only sell for around 270.

You can pay in installments if the property takes time to sell (see link) but the bill is still based on the value at the date of death.

If the sale price exceeds the value at death you pay Capital Gains Tax on the differance. If the sale price is less than the value at death you can apply for fall in value relief.

http://www.hmrc.gov.uk/inheritancetax/payi...ments/index.htm

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Old people. They get rich, grow old then die. Leaving a house that would make the tax man cometh in righteous fury if the inheritors sold. So they take out a mortgage on it and rent it out to cover the interest on this "free" loan. This is tax avoidance at its most elegant for your average prole. At some point in the distant future they move in having sold their last place tax free as their primary residence.

I propose you are seeing demographics in action.

This sounds about right. Our last rental was 1/2 a large house in putney for 600 a month. The landlord (a friend) could have sold it for 1/2 million imho at the height of the boom, but it would have cost him too much to be worth it. Apart from anything else, a steady income on an asset you never bought in the first place is pretty nice.

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Last time there was just 2 years ago. I am in shock at the VAST number of To Let signs outside otherwise normal residential family houses (i.e those not converted into separate upstairs and downstairs flats). Those signs were definitely not there last time I drove through the area.

Could be something like St Margarets in Richmond -

all of the houses have been converted to one floor flats and let; hence the large number of to let signs?

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Earlier today I had the opportunity to drive through one of my old stomping grounds which I have seen less and less of in the past few years - the 'leafy' suburb back streets of Finchley up to Totteridge in NW London. Mrs Thatchers old constituency area in parts.

This has always been a traditionally moderately affluent area.

Last time there was just 2 years ago. I am in shock at the VAST number of To Let signs outside otherwise normal residential family houses (i.e those not converted into separate upstairs and downstairs flats). Those signs were definitely not there last time I drove through the area.

IF this is the middle class struggling to pay their mortgages or deal with debts in general, then to take this step means they must be one step short of selling the family silver to need to do this - and they are hanging on by their proverbial fingernails.

This recession really is going to be an economic blood bath before it is over!

I live in NW4, Hendon the next suburb to Finchley. There are also lots of to let signs also on big family homes, those selling for more than £1m at peak, 2 on the road next to me for in rent in excess of £1000 per week, but although we have STR the price of houses for sale has not dropped at all. Same in Hampstead Garden Suburb, N2, also neighbouring Finchley.

Was speaking to agent in Friday - he asked if I wanted to see a house that the owners don't want any marketing for.... I guess it could be a divorce but I immediately thought money problems. Has anyone else come across this? We will not be looking as the asking price is a peak price...

I don't think it all money troubles, I suspect a mix, one I know of is someone rich who bought house for his child back in 2006 before prices went up even more but wants to rent it out in the meantime, others will be people who want to move area and don't want to sell in the trough as they think the market will bounce back, others probates (less likely as these houses often not in rentable condition).

Edited by grizzly bear

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I'm not sure it is. I bet it's people who want to move and don't want to sell "at the bottom" and so are renting out until it "all blows over"

So what have learned here, boys and girls, is what we already knew. There are a lot of Mooks out there who have inherited.

Here's a radical thought - inherit a big house in London, accept that its really worth £400K not £550K. Sell it. Pay the inheritance tax of £400K -£325K * 40% = £30K. Trouser £370K, get on with the rest of your f*cking life.

Anyone in this position who spends the next 5 years trying to find a way to realise £550k and not pay IHT is a complete moron who will hopefully end up with a lot less than £370K.

IMHO of course.

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don't want to sell in the trough

That's twice in one thread the mythic 'trough' has been mentioned. No one will know when the trough is until way after the event so no one, bull, bear, neither or VI has any right to declare where we are in the 'trough'.

Also HPC may not trough at all but rather we will see an L shaped decline on house prices. My personal view is that we will see another big leg down in house prices sometime in the next 12 months (please, please let it be before the election) and then no recovery in real terms. In decades to come people will look at old articles and adverts for property in 2007 and say "That can't be right - that would be equivalent to £x millions allowing for inflation - must be a misprint".

Short of an sudden an unexpected breakthrough in alternative energy costs there is nothing in the world economy going forward that will underpin real property price increases or middle class prosperity (are these the same?). Quite the opposite in fact.

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That's twice in one thread the mythic 'trough' has been mentioned. No one will know when the trough is until way after the event so no one, bull, bear, neither or VI has any right to declare where we are in the 'trough'.

Also HPC may not trough at all but rather we will see an L shaped decline on house prices. My personal view is that we will see another big leg down in house prices sometime in the next 12 months (please, please let it be before the election) and then no recovery in real terms. In decades to come people will look at old articles and adverts for property in 2007 and say "That can't be right - that would be equivalent to £x millions allowing for inflation - must be a misprint".

Short of an sudden an unexpected breakthrough in alternative energy costs there is nothing in the world economy going forward that will underpin real property price increases or middle class prosperity (are these the same?). Quite the opposite in fact.

I completely agree with you - I'm just quoting what people say to me.

The agent that I spoke to seemed convinced that we should buy now of course as 2007 would be back within 18 months. There is just no point in trying to explain thats wrong when he says he's the expert as he's seem huge pick up in demand and activity in past few months.

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I'm not sure it is. I bet it's people who want to move and don't want to sell "at the bottom" and so are renting out until it "all blows over"

That is also true. I see it from this area of the South East.

But of course, the rental market cannot expand to accommodate all the new landlords. There never was double the demand for rented property which is on the market now. Don't forget that unaffordable housing has made many rents unaffordable too.

So, as everyone knows, the market is stagnant. People are not maintaining properties, in the same way as if they lived in them. Properties have become staging posts on the imaginary ladder, objects of short term speculation, marginal rental commodities . . . it is not so surprising to see areas in decline.

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