Thursday, 23 October 2014

Here's Another Gem...

From here:

Exhibit 1

Me: Ah, but DH has 'earned' a tax free £1.5m ish on his house....

Mountainousipswich: No he hasn't. Not until he sells it, if he sells it. And there could be a property crash before then. He may even - amazingly - want to live in it and pass it on to his kids.

Me: That's just silly. Of course he has it. If you bought shares and they went up you'd be richer. And all asset prices fluctuate. If his house price goes down he pays less tax. Really, come on now...?

Mountainousipswich: Shares are not money, where did you get that idea from?

If I buy ten shares in Apple at $10 a share, then I have $100 worth of shares, not dollars. Those shares might increase in value to $20 each, but I would only make an extra $100 if I sold them at that point. The shares may also decrease to $5 a share. But at no point do I have money until I have sold the shares and received the cash in hand.

Warren Buffett - who owns several billion in shares - would be completely penniless tomorrow if the world markets completely crashed.


I mean, really? Am I missing something?

15 comments:

Mark Wadsworth said...

Nope.

The "capital gain" is unrealised but that is irrelevant. The rental value has gone up, so the owner is consuming more rental value, end of.

It's the same with shares. If they double, the chances are it is because profits have doubled so the company will be paying twice as much corporation tax. The owner doesn't need to pay tax on the increase in value as the company is paying his share for him.

Lola said...

MW. Yup.

Ben Jamin' said...

In my experience, there's no point arguing about whether a capital gain is earned or unearned.

Just get straight to the point. Who creates and sustains the value of land that freeholders property occupies?

Graeme said...

Lawson's idea of re-rating porperties on their sale values just seems more and more sensible...if you don't want to go through the fag of re-rating everybody's house, barn, shed..... Ans with Zoopla, you could extend it to entire postcodes

Lola said...

His online name refernces my home town. I have offered to go for a drink with him. I wonder....

Mark Wadsworth said...

G, yes, my favoured choice of geographic area for averaging values is the "postcode sector", there are about 9,000 of these with about 3,000 homes in each.

Using averaged values is in fact far better than individual valuations, as it means that the tax is the same regardless of whether a home in any category (for example flat, terrace, semi-detached, bungalow, detached) is in tip top nick with an extension or a bit run down.

Which makes it more or less like Land Value Tax, even if you use recent selling prices.

More on the KLN blog.

Graeme said...

agreed Mark...it's simple and practical and does not involve an inspectorate.

L fairfax said...

The difference between shares and houses are this.
If I put £200k into shares of company x and they go up 10x. Then I can sell shares over a number of years and live off the money.
If my house goes up in price, if I sell it I will be rich and homeless - not a clever idea.

Lola said...

LF. Nope. In either case you are looking for 'rent'. The price of a share reflects the discounted value of the future income stream. You do not have to 'sell' shares to live off them (aka 'a portfolio'). You can enjoy the dividends. But if you do you have to pay CGT. Boo sucks. And you get the reward for providing this capital to business/liquidity to the capital markets directly in proportion to the level of risk you are willing to take. Investing is by definition socially responsible and aids true wealth creation.


OTOH you can take the humongous unearned gain from you house un-taxed and then invest that in an 'income portfolio' and - as I have done the sums - I can guarantee you that that portfolio will yield sufficient income for you to rent back the house AND have a little over for the necessities of life.

But what you can't do is cash in a house a brick at a time. That's why 'investing' in your own home is no such thing. It's a speculation of the worst kind, and in any event it's the land value you are speculating in, not the house.

Bayard said...

It is possible to invest in your own home, by buying something run down and "doing it up" it's just that the gains are dwarfed by the increase in land value, usually. The downside is that you have to be prepared to live on a building site for the first part of the operation.

Lola said...

B. That's exactly what we did. Bought this house with no water, no drains, not much leckie ripped it apart and rebuilt it. It cost £35K to buy the wreck in 1987. We have spent about £150,000 on it. It's now valued at about £500,000. The difference is entirely land price inflation. You could rebuild the whole thing for what we have spent.

Bayard said...

"You could rebuild the whole thing for what we have spent."

Easily done, and I did it too, with my last house, but in my experience, it is the initial work that adds the most value. Once the house is mortgageable, then it's really downhill from there, return-wise, mostly because you are doing work that another buyer might have done differently, e.g. everything you spend on the kitchen. I've heard it said that the best return on expenditure is to put in central heating, although reordering to create an additional bedroom must run it close.

Mark Wadsworth said...

it is the initial work that adds the most value. Once the house is mortgageable, then it's really downhill from there, return-wise, mostly because you are doing work that another buyer might have done differently, e.g. everything you spend on the kitchen.

One of my favourite topics. So if the kitchen has the perfect lay out and you just replace the doors, it doesn't add to selling price. But if the layout is shite and you sort that out, it adds a lot of value.

Quite how much and whether that exceeds the cost of doing it are tricky but enjoyable calculations.

Bayard said...

"But if the layout is shite and you sort that out, it adds a lot of value"

Yes, but the next buyer is probably still going to want to replace the entire kitchen, even, if they keep the improved layout. Alternatively, they might even disagree with what you think is a good layout, e.g if, like me, they think that the kitchen could be better laid out if the sink wasn't under the window, whereas to some people having the sink under the window is a must.
OTOH, I'd agree that a well-laid out kitchen is something that adds to the appeal of a house and hence its selling price, even if the buyer fully intends to replace it in its entirety, such is human nature.

Lola said...

MW /b. Broadly agree re kitchen. We made big effort with kitchen - great layout, lots of space, table patios door bay, stunning view, Aga. But, I have no intention selling. All done for our pleasure.