Share with friends when you retire
It's quite a shock to wake up on your 50th birthday and realise that you are suddenly part of a statistic: the UK population is getting older. Those of us in our early 50s and up are part of the post-war baby-boom generation, those born roughly between 1946 and 1964, and, according to the Office for National Statistics (ONS), there were more than 11.1 million people over the age of 65 in mid-2013 - 17.4% of the UK population.
The number of people in that age group has increased by 17.3% since 2003, according to the ONS, and that number is predicted to rise to almost 17 million by 2035.
Additionally, more than 1 million people in the 65 to 74 age group will be without children by 2030, compared to 580,000 in 2012. Those who do have children will find that they are increasingly likely not to live nearby. A study last year by think tank the Institute for Public Policy Research reported that greater numbers of older people will be at risk of experiencing loneliness and isolation, a trend that naturally increases the older you get as partners and friends die.
All of that points to a pretty bleak outlook for those of us who can no longer claim to be in the first flush of youth. However, one thing that those of us nearing retirement do tend to have is wealth tied up in property.
Some years ago, when I and my friends were in our early 40s, we started joking about setting up a joint retirement home, a place where we wouldn't have to play bingo, where blue rinses would be frowned upon and where the music wouldn't be big bands, it would be "deep house".
As we have got older, that conversation has turned from a joke to an increasingly serious discussion about how we might think about one day pooling our resources and living communally in a way that suits us and doesn't put a burden on our relatives and offspring.
House price growth means that many people in my age group – not yet retired or infirm and with a good few years before we are really old – have a fair bit of wealth in the properties we bought in the 1980s and 1990s. A quick back-of-the-envelope reckoning suggests that five of us could probably rustle up a sum of between £4 million and £5 million in cash through the sale of our homes.
So how practical would it be for groups of older people to pool their resources to buy a property to live in communally?
Buying a property for communal living is familiar to younger people, although it is more often the case that parents will buy a house as an investment that their university-bound offspring can live in, servicing the mortgage by charging rent to other students who share the house.
Crowdfunding for property is also not a new concept: you can put money in to property via funds and unit trusts, and you can also invest in property via specialist companies such as The House Crowd (thehousecrowd.com), which takes the principle of crowdfunding and applies it to investment properties, allowing investors to spread their risk over several properties and invest small amounts.
Frazer Fearnhead, founding director at The House Crowd, says his clients invest in crowdfunded properties via limited companies "because we are dealing with larger numbers of people, so it makes shares relatively easy to transfer. It also gives people security as they have a share certificate with evidence of ownership. We have to publish annual accounts, so it aids transparency and also, for legal reasons, we are promoting it as an investment."
However, Fearnhead says that if he were to consider buying a property jointly with friends to live in, he wouldn't set it up as a limited company. "I would look at structuring it as a partnership," he says. "What you're proposing isn't a commercial enterprise and so having to set up a company and file accounts would be a lot of paperwork. I would have thought a simple partnership agreement protects everyone's interests."
The key thing to consider is just that: protecting the interests of everyone involved. Theo Hoppen, head of family and personal dispute resolution at MLP, the Manchester-based law firm (mlplaw.co.uk), agrees that setting up a limited company to buy a property jointly isn't the way he would recommend doing it. However, he says that a partnership wouldn't be the best way forward, either.
Hoppen, who usually deals with couples buying property together, says that in the case of a group of friends, the same approach still applies. "You need two documents," he says. "You need a cohabitation agreement and a deed of trust."
These two documents mean there is no need to set up either a partnership or a limited company. A deed of trust is a legal document that sets out the financial agreement between the parties to the property purchase, including noting how much each person has contributed.
Tenants in common
A cohabitation agreement "deals with the wider aspects of cohabitation", says Hoppen. "It sets out things like how the mortgage, if any, and utilities bills are paid, or what happens if one party wants to sell up. It will set out how the property is valued, for example."
Hoppen points out that you can combine the two documents: "A cohabitation agreement can include a deed of trust but it's cleaner from a lawyer's point of view to have two separate documents," he explains.
A cohabitation document is particularly important for people buying property together who are not married as they often hold a property as tenants in common rather than as joint tenants. The same would apply to a group of friends buying a house to share.
Married couples usually opt for a joint tenancy when it comes to buying a home because that means they own the property jointly and when one partner dies, the property automatically reverts to the other joint tenant or to their heirs. Joint tenants can't pass on their share of the ownership to anyone else in their will.
However, with unrelated people buying a property together (particularly if they do not own equal shares in the property, perhaps because they have put in different amounts of money), it makes sense to own the property as tenants in common.
The deed of trust will state clearly how much of the property each tenant owns. If those proportions aren't stated, the law assumes that each tenant holds an equal share.
Tenants in common can each leave their share to a third party, something that is particularly important if a group of older people were buying a house together: their heirs would be protected by the tenancy in common.
This means that any agreement drawn up between the group must also cover what happens to the property if one of the group dies or wants to leave the house.
Members of the group could agree to bequeath their shares in the property to each other and have their wills drawn up accordingly. Alternatively, each group member could leave their share to their heirs but grant the other members of the group a "lifetime interest" in the house, which is the right to live in the property until they die, with the house finally being sold and the proceeds distributed to the heirs after the last person has died.
"If I died leaving you a right to live in my half of the property, then on your death your heirs would be liable for inheritance tax on the whole property."
If a group of older people were thinking about jointly buying a house, the issue of inheritance tax would need some attention: at present, inheritance tax of 40% is due on an estate – including property, cash and possessions – worth more than £325,000 at the time of the owner's death. A group of people would need a larger property that would be very likely to be worth more than the IHT threshold.
It is impossible to generalise about how IHT issues might affect a diverse group of people, as everyone's financial circumstances are different: for example, if the group were relatively young and healthy and had a reasonable expectation of surviving beyond seven years, it would be possible for each member of the group to give away their share of the house to their heirs and for it to be free of inheritance tax.
However, the members of the group would have to pay the new owners of the property – their heirs – a market rent to avoid the estate being liable for inheritance tax when the time comes. And of course the group would have to trust not only each other but also the heirs not to force a sale of the property or otherwise stop them living there.
Another possibility is setting up a discretionary trust. This would mean giving the assets – the house – to beneficiaries, the people who will get the benefit of the assets in the future. The assets are managed by the trustees, who technically own the assets. The upside of this from an IHT point of view is that because the assets no longer belong to the group, they are not liable for IHT as the house, or their share in it, would not form part of their estate.
However, Gill points out that despite the existence of a trust, the property could still count for inheritance tax. "Although an individual has placed a property, or part of a property, into trust, that individual will still live in the property, which will therefore result in a gift with reservation of benefit." In other words, unless the group members paid a market rent to live in the house, which might not be possible on their pensions, the house would still count towards an IHT liability.
Gill also points out that setting up a trust carries further costs. "I would not suggest setting up a discretionary trust if the value of the property is excessive, as this will result in a 20% entry charge." Additionally, a trust incurs a tax charge every 10 years and so if the group members survive for a long time after the trust is set up, those charges could be higher than the inheritance tax they hoped to avoid.
Gill adds: "The alternative is for the individuals to purchase the property in their own names as tenants in common with a declaration of trust confirming the percentage split. Each owner would need to leave a life interest in their wills for the surviving owners to continue living in the property. However, on the survivor's death, for IHT purposes the survivor would be regarded as having owned the whole of the property – resulting in a potential IHT charge."
Another problem a group of older friends looking to live together might face is insurance: insurers are less keen on insuring sharers than family groups and couples.
Ian Galloway, specialist division manager at broker Swinton Insurance notes that while "older people are considered a lower risk by insurers and can as a result enjoy lower premiums", he adds that this kind of arrangement "might not be something a normal home insurer will cover".
He explains that each case depends on individual circumstances: while insurers are used to insuring students who live communally, not all insurers will underwrite that risk. "But 18-year-old students are completely different from mature individuals," he notes.
Everyone I spoke to about the concept of older people pooling their resources said they thought it was a good idea and added that they wouldn't be surprised to see it happening increasingly often in the future.
"The crucial thing is to establish the ground rules," advises Fearnhead. And those ground rules should cover everything from sorting out how utilities bills are to be paid and what happens when group members die to issues of living together.
Old age doesn't have to be a desultory existence in a care home as babyboomers and then Generation X move towards retirement; it could be an opportunity to think creatively about how we want to live. As one of my friends, a 50-something DJ, points out, the issues that my group would need to agree include "what level of soundproofing should be installed and exactly where" to avoid annoying the neighbours with loud music on the nightclub-standard sound system at 4am.
The process of applying for the right to deal with a deceased person’s estate. If a person has left a will, they will usually have appointed a will executor. The executor then has to apply for a ‘grant of probate’ from the probate registry, which is a legal document that confirms the executor has the authority to deal with the affairs of the deceased. If a person dies without making a will, intestacy law applies (see intestate).
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.