Reinvest - Use a lump sum inflow to purchase a property or other asset

Use a lump sum inflow to purchse a property or other asset

To schedule the purchase of a property / asset with a lump sum inflow, first go to the Property / Assets screen.

1. On the People panel, select one or more owners for the property. If the property is co-owned by a client and his or her spouse or partner, select them both to indicate co-ownership.

An owner can be deselected by simply clicking the check mark. 

2. Select the Type of property. 

Note: A Primary Residence is CGT exempt. A Business Property may be eligible for entrepreneur's relief and possibly business property relief (BPR) or agricultural property relief (APR). You will find settings for these special tax treatments for businesses under Advanced Settings > Taxation.

3. Enter a Name for the property. 

4. Enter the Market Value and Effective Purchase Value of the property. These entries can be present or future values. We will discuss how to set present versus future values in a moment. 

- Market Value will be used as the purchase price of the home.

- Effective Purchase Value will be used to determine the cost basis for the property, which is the basis for future CGT calculations. Note that unlike other assets, primary residences are not subject to capital gains.

5. Be sure to tick the New Purchase? checkbox.

When selected, a purchase expense will be created automatically for the property at its scheduled purchase event (i.e. start event), which we will be selecting in a moment. This purchase can be fulfilled from cash and other available liquid assets, financed in whole or part using a linked mortgage, or possibly a combination of the two.

6. Expand the Details panel.

7. Set the Values calculation to Present Value or Future Value. This setting is especially relevant when scheduling a future purchase.

- Select Present Value (the default) if the purchase price is to be inflated until the year the property is bought. An Inflation Rate % will be applied to the property’s Market Value until its year of purchase.

If Present Value is selected, enter an Inflation Rate % in the field below. This rate will be used to inflate the Market Value and Effective Purchase Value annually until the home is purchased.  A negative value (e.g. -2.5) could be entered into this field to deflate the future purchase price and value of the home.

- Select Future Value if the purchase price is to be treated as a future amount. When selected, an Inflation Rate will not be applied to the future purchase price of the property. The purchase price of the home will be the value as entered in the Market Value field.

If selecting Future Value is selected, simply leave the default Inflation Rate % as is. This rate will not be used to calculate the purchase price or value of the future home.

8. Enter a Growth/Depreciation Rate % for the property. This percentage will be used to grow or reduce the value of the property over the course of the planning timeline, once the property has been purchased. A negative value (e.g. -3) could be entered to calculate a depreciating property value.

Notice that the line graph at the bottom of the screen will adjust to show the trajectory of the property value as it is calculated using this rate.

9. Select or deselect the “Exclude Property if Purchase Not Completely Fulfilled” checkbox.

Note: This option is only shown when the New Purchase? checkbox is selected.  

- If the Exclude Property Option is Selected – If cash, including financing from a mortgage, and other liquid assets do not meet the full purchase price of the property, it will not be purchased. A shortfall in the amount of the full purchase price will be shown in the cash flow chart, indicating that property could not be purchased. No funds will be withdrawn from cash or assets to partially meet the purchase expense for the property.

- If the Exclude Property Option is Deselected - Funds will be withdrawn from cash, which will include any financing from a mortgage, and other available liquid assets in an attempt to purchase the property. If these funds do not meet the full purchase price of the property, a red shortfall will be shown in the Cash Flow chart indicating the amount of the purchase that could not be fulfilled. The property will be assumed purchased, however. This shortfall must be addressed at some point for the plan to be valid.

10. You may expand the Liquidation panel. Be sure to leave the default, At End of Applied Timeline, selected. This is generally the recommended setting. 

12. Next, let' schedule the purchase of the home. Go to the Time panel located on the right side of screen.

13. Select the Event tab.

14. Select a start event for the property (green dot). This event schedules when the property will be purchased.

15, Next select an end event for the property (red dot). This selection sets when the property will be liquidated. If the home will be held until the plan’s end, select the unowned final Mortality event.

The line graph will adjust, giving you a illustration of when the home will be purchased, its appreciation or deprecation thereafter, and the eventual liquidation of the property.

16. Finally, you may enter and link any incomes or expenses related directly to the property.

17. Click Add or Update to save these changes.

The property will be shown in the ledger on the right side of the screen.

 

Funding the Future Purchase (at least in part) Using a Debt

If you wish to provide additional funding through a secured debt, go to the Debt screen, enter the details of the debt, click the Asset field, select the property from the list and click Link. Linking the property to the debt will offset the purchase price by the credit provided from the future debt. 

 

Checking the Purchase in the Let's See Charts

To confirm the purchase, go to the Let’s See charts and click the year in which the property/asset is scheduled to be purchased.

The chart legend will display. Select the Detailed Info link located at the bottom of the legend.

The details panel will display. The Cash Flow tab will show a lump sum cash inflow.

The Expenses tab will show a Milestone category purchase expense for the new property (e.g. New Home – Purchase Expense).

The Property tab will show the newly purchased property. The total purchase price will be displayed next to any debts (mortgages) linked to the property and the remaining cash cost of the property. If the home was financed in part with funds from a mortgage, the out of pocket costs will indicate any funds pulled from cash or liquid assets to pay for any portion of the purchase that is not covered by debt.

 

 

Related Topics

Is surplus income assumed spent or saved?

What happens to a lump sum inflow if it is not spent or reinvested? How can they be reallocated?

 

Other possible ways to use lump sum inflows proactively within a plan include: 

Transfer (deposit) a lump sum inflow into a savings account, investment or money purchase

Use a lump sum inflow to purchase an onshore / offshore life fund or discounted gift trust

Use a lump sum inflow to pay off a debt

Use a lump sum inflow to pay down a debt

 

Further Reading

Cash Flow Basics - An introduction to the basics of cash flow in Voyant