There was a poster on askaboutmoney.com who was thinking of upgrading their home. They didn’t necessarily want a bigger home but they had accumulated a lot of cash and wanted to do something with it. By buying a much more expensive home, they would be investing in a tax free investment that would accumulate over time. While the tax regime on investments in this country are certainly designed to discourage saving, I think it
Financial planning is about liquidity and cashflows. You need to have access to your assets in order to enjoy your life. If you invest in your own home you are sucking a large amount of cashflow out of your pot and putting it into an asset that is extremely illiquid.
As it is your own home, if you want to sell it, you also have to move house! If your house is at the top end of the market, there is a very small market that you can sell it too. Even in a buoyant property market, convayancy and legals will take a number of months. You will need to ensure that you have enough liquid assets as well.
The poster mentioned that the value of the property can be passed to his children as part of their inheritance. If that is the case, the tax savings goes out the window because unless they are still living in the family home (remember, they are likely to be in their 50’s and parents/ grand parents themselves), they will have to pay CAT on any inheritance. In fact, at least with liquid assets, they have the funds to pay the tax bill. If they get a massive house, they will probably have to sell it to pay the tax on the inheritance.
A bigger house means bigger maintenance costs, especially if you buy a period home. You cant just put up PVC windows, they have to go with the style of the home. And specialisation means you have to pay more. You will also have bigger running costs as there are more lights on, a bigger space to be heated etc.
Moving to a more affluent area can also impact in the cost of your lifestyle. If your neighbours have more expensive things, go to private schools, golf clubs fees, it can rub off on you. And even if it doesn’t rub off on you it can rub off on your spouse and children. Your husband may becoming pally with a few neighbours who play golf at a club with €30,000 entry fee and he wants to play with them. The local secondary school may be one with €7,000 a year fees.
I’m not even sure you are going to be any better off anyway. When you invest in property, you usually get a return for your investment through capital appreciation and rental income. By living in your property investment, you are forgoing the rental income part of the investment.
So I looked at investing €1m in equities, earning an annualised return of 5% and a dividend of 2.5%. The dividend is taxed at 52% each year and the remainder reinvested. CGT at 33% is paid on the gains at the end. For the property, I looked at investing the €1m with a return of 4% per annum. I ignored the value of the current home as in the first instance, they will live in it and in the second instance, they will have to buy a new home to realise the gains they made from their €1m upgrade. In both instances, I have ignored fees.
| Equity Investment | House Investment | |
| Value after 10 years | 1,824,926 | 1,480,244 |
| Tax Payable | 225,923 | 0 |
| Net Cash | 1,599,003 | 1,480,244 |
So they wouldn’t be any better off by what they are doing. What if they kept the property for longer?
| Equity Investment | House Investment | |
| Value after 20 years | 3,330,354 | 2,191,123 |
| Tax Payable | 632,174 | 0 |
| Net Cash | 2,698,180 | 2,191,123 |
No, the gap in value is increasing.
What do you think? Let me know by emailing me at steven@bluewaterfp.ie