Money Makeover: ‘Should I use my £150k inheritance and pension to buy a holiday home?’
Sharing a holiday home with family has long been a dream for Laura Smith, whose name has been changed and who lives in Newcastle.
Mrs Smith said she hoped to buy a house in Edinburgh with her two elder brothers, using money inherited from their late parents. The property would serve as a base in their home country, as she lives south of the border and her siblings are both abroad.
She said: “I’d much prefer to have a holiday home than leave the money in an account.”
A retirement lump sum of £67,000 and an expected inheritance of £90,000 could go towards her share. But Mrs Smith wants to know if it is wise to invest the cash in property and, if so, how to go about making a three-way purchase. Her share of the property would eventually become an inheritance for her two children and Mrs Smith said she had considered putting it in their names.
The 55-year-old physiotherapist will start to receive her NHS pension of £10,000 a year in the autumn and plans to retire in three years. In the meantime she will continue to earn about £25,000 a year, on top of her pension. She has been living on this income comfortably and said she could afford a drop when she stops working.
She has £10,000 in shares in GlaxoSmithKline, the pharmaceuticals company, £5,000 in Premium Bonds and £10,000 in a stocks and shares Isa with Virgin Money. She also has £40,000 in a poorly performing flexible mortgage Isa, which is due to pay out in 2025.
The soon-to-be retiree wants to know if she has enough savings to see her through retirement and invest in the property, too. “If buying a house is a really poor way to optimise my finances then maybe it is not the best option, but in my heart I would love to,” she said.
We ask two financial professionals if her vision is realistic and if her current investments are suitable.
Olly Cheng, financial planner at Saunderson House
Mrs Smith’s first priority should be to make sure she has enough money saved to meet her needs before she buys a property.
If there is a lump sum left once her retirement income has been sorted out, buying the property could be a good idea. Given they won’t be renting it out, it is unlikely to be the best investment from a purely financial perspective. But if it makes a big difference to her lifestyle it could be the best use of her inheritance – especially if it would mean spending less on holidays.
It is worth noting that a second property will come with its own expenses and she would need to know whether the income from occasional rental would cover them or whether it would be a further expense in retirement.
If she is concerned about achieving the best investment return, she would probably be better off investing in a portfolio of funds and moving £20,000 of the portfolio into an Isa each year to gradually reduce the tax burden. Some of the income could always go towards an annual holiday in Scotland.
Buying the property in joint names is fairly straightforward and her brothers being abroad won’t cause any difficulties as long as she doesn’t plan to take out a mortgage. In Scotland the property should be held in joint names but without a survivorship clause as she wants a share to go to her children.
She should have a detailed discussion with her brothers about everything – from who pays the bills to what will happen if one of them wants to sell. Even if they are all in agreement now, Mrs Smith needs to be prepared for the possibility that someone may change their mind and things may not go smoothly.
She won’t be able to move the property into her children’s names until they are both 18, and even then it may have limited benefit for inheritance tax purposes. If she gives it to them in her lifetime, capital gains tax will be payable on her share. If she did this and continued to stay occasionally without paying rent, the property would not be fully given away and it would still form part of her estate as a “gift with reservation of benefit”.
Toby Bentley, financial adviser at Lathe & Co
At 67, Mrs Smith will have a stable retirement income derived from her NHS pension of £10,000 a year and her state pension, currently worth £9,339 a year.
Therefore, if her current earnings will comfortably support her lifestyle from now until her retirement at 58 and if she has a secure income from age 67, the nine-year gap between the two is the portion of retirement she needs to prioritise.
With this in mind, the timeframe does not suit an investment in property, as her greatest need for income will be in the early years of her retirement before her state pension is paid.
Obviously, property is one of the hardest assets to draw funds from. A holiday home will attract additional stamp duty on purchase (as she already owns a property), won’t yield an income as they don’t plan to regularly rent it out, is inside her estate for inheritance purposes and attracts capital gains tax on disposal. And logistical headaches may arise if one of the siblings wishes to sell before the others.
It would be far more tax efficient for Mrs Smith to use some of her savings and excess income while she is still working to pay into a personal pension, ensuring that she adheres to potential “pension recycling” rules.
Not only would this attract 20pc (basic rate) tax relief but any investment growth would be tax free, the funds are outside her estate for inheritance tax purposes, and it is far easier to draw income from a pension than from property should she need it. She could use further savings to continue to pay into her Virgin Money Isa, which also offers tax-free growth and has the advantage of easy access.
In terms of her other investments, Mrs Smith has an inconsistent approach to the risk she is willing to take. On the one hand she holds volatile GSK shares, while on the other she has opted for risk-free Premium Bonds. Neither is a bad option, but with a more consistent attitude to risk she should be able to achieve growth she is comfortable with.
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