Q - I have a property scheduled to be purchased in the future (15 years from now) and I see that the purchase price is considerably higher than what I entered. Have I done something wrong?
A - Most values (with the exception of future transfers between accounts) are entered into Voyant as present values and are inflated going forward from the beginning of the plan. Present values are usually desirable because they allow you to think of everything in today's terms. The software can then work out what the inflationary difference might be in the future.
The setting that controls present / future value are found under Advanced Settings on the Growth, Details, or Inflation panel, depending on the screen.
When scheduling the future purchase of a property, the software will assume that the future cost of the property, its Market Value, will be a figure inflated from today's cost.
For example, you have a client who plans to purchase a holiday home when he retires, possibly using some of the tax free cash from the crystallisation of his money purchase. Today this property would cost about £300,000, but your client will not be retiring until he is 60, which is in about 18 years time. It is likely that the cost of this property will inflate between now and then.
To schedule this purchase, add an event named "Purchase Holiday Home" to the timeline. You might use instead John's retirement but this event gives you more flexibility to reschedule the property purchase without affecting your client's retirement plans, should that be necessary.
Enter details about the future property on the Property / Assets screen. On the Time panel, to the right side of the screen, schedule the purchase by selecting a start event (Purchase Holiday Home) and select an end event (Mortality) to show that the property will be owned until the end of the plan.
Enter the current Market Value (purchase price) and the current Effective Purchase Value (the cost basis, which is used for CGT calculations) for the property. For future purchases, these two values will in most cases match.
Both of these are present values that the software will inflate between now and the year the property is purchased.
Also be sure to tick New Purchase. By ticking this check box, the software will create a purchase expense in the selected start year.
The purchase price (Market Value) of the future holiday home will inflate until the property is purchased.
Inflation of future purchase price is set on the Property / Assets screen's Advanced Settings > Details panel, in the Inflation Rate % field.
Add / Update to save these entries.
To view the results, go to the Let's See charts.
Click the bar/year of the chart in which the property is to be purchased.
Click Detailed Info.
Both the Property and Expenses tabs of the details panel will show the purchase price. Notice how the purchase price is higher than the £300,000 that you entered in the Market Value field. This is because the £300,000 was a presnet value thta have been inflated from the start of the plan for 18 years, until the property is purchased.
But perhaps your client has a specific future amount budgeted to purchase the holiday home. If he future purchase price of £300,000 should be treated as a future amount and not be inflated, select Future Value on the Details panel.
When Future Value is selected, the Inflation Rate below it will not be used to grow the market value of the property up to the year of purchase. This is to say, the future purchase value of the property will indeed be £300,000.
Appreciation (or depreciation) of the property after purchase
Once the future property is purchased, the Inflation Rate indexing will end and the Growth/Depreciation Rate will go into effect to model the property as appreciating in value.
Losses, depreciating properties - Note that a negative figure (e.g. -2%) could be entered in the Growth/Depreciation Rate field to model a property that is losing value annually. If the property is later sold at a loss, the total depreciation in value (the sale price minus the effective purchase value / cost basis) would be recorded as a capital loss, which the software would later use to offset subsequent capital gains.