If you have been lucky enough to own your home during your working life then, by the time you reach retirement, it is likely that your home is the largest part of your total wealth. But often your income falls at retirement or in subsequent years and at some stage it may not be adequate to do the things that you need to do.
You may need to release money to fund:
- your daily living expenses
Whatever the reasons for needing to release the money tied up in your home there will be significant financial decisions to be taken and there may be tax and related benefit issues to take into account.
Firstly, we want to look at the different ways someone may ask you to consider when raising money from your home. Any salesmen who have approached you with ideas should be able to show that they are regulated by the Financial Services Authority in equity release issues.
Lifetime mortgage
You probably took out a mortgage when you bought your home, but this may well have been paid off by the time you reached retirement. A lifetime mortgage is doing the same borrowing over again, but with a difference. A mortgage company lends you money but you do not pay it back in your lifetime. When you die, the loan is repaid from the sale of your home.
Because you do not actually pay the interest that accumulates on the loan the amount you owe grows faster than you would have probably have seen with your previous mortgage. It may be important to have a “no negative equity” guarantee, so that you, or your heirs, do not have to repay more than the value of your home.
You can usually repay a lifetime mortgage, but it is advisable to check the small print very carefully in case an early repayment charge can be imposed.
Home reversion
With a home reversion, instead of borrowing money on the security of your home, you actually sell all or a percentage of your property with the right to live there for the rest of your life (or until you go into long-term care).
You will not get full current market value for whatever percentage is sold as the reversion company does not know when they will get the return of their money. Having sold part of your home it is unlikely that you will be able to buy it back if your circumstances change.
Other methods
Sometimes it is possible to obtain interest only mortgages where the capital is repaid on death and the interest payments are made from the borrower’s income whilst they remain in the property.
Similarly, and more elusive, are shared appreciation mortgages where the lender loans the borrower a capital sum in return for a share of the future increase in the growth of the value of the property.
Many people wanting to release capital from a home decide to trade down and buy a smaller and cheaper property.
Sometimes children acquire their parents’ property, whilst allowing their parents to remain in their home.
What are the key factors?
A combination of the following factors is involved in all types of arrangement:
- how long you are going to live
- the interest rate now
- future interest rates
- the discount, as against current value, which is given for the acquisition of part or the whole of a property
- the growth or otherwise of the property market in the future and whether you will share in any part of that growth for the part of the property you have sold
- the small print may contain very important information so look for what happens if you go into a care home or if unexpected circumstances occur
- your views about what you might want to leave to your heirs
- fees and charges
- tax and benefits issues.
There have been instances of aggressive selling of equity release plans, which is one of the reasons why regulation has been tightened. It is very important that independent and specialist advice is sought.
Even with specialist advice you need to ask at the start for firm quotes as to cost. For example, costs could include:
- Search fees
- Land Registry charges
- Solicitor’s fees
- Valuation fees
- Arranger’s fee (may be the largest component)
- Additional costs for insurance demanded by the lenders
We are only going to focus briefly upon the tax and benefits issues.
Tax issues
The capital sums in nearly all equity release arrangements will be free from tax, but some tax issues have to be considered.
Whenever you sell any property the issue of capital gains tax potentially arises. A disposal of a main residence in which you have lived for some years does not usually give rise to a tax issue because of the main residence exemption. But not all homes fall wholly within the exemption: some may have been let out in the past or have been used for business purposes. The history of the home should be checked.
In 2005 a pre-owned assets tax was introduced as an inheritance tax avoidance measure. It is an annual charge to income tax on the annual value of assets which a taxpayer has given away but continues to enjoy in some form. It also catches situations where the taxpayer has contributed to the acquisition of property from which he or she later benefits. It is an obscure and unfair tax and can apply most often where a parent gives away a home (or part of it) to a child but continues to live there, perhaps being looked after by the child.
For inheritance tax purposes the use of an equity release scheme may have positive advantages due to a reduction in the value of the estate. Professional advice should always be taken.
Benefits issues
Many State benefits are not means-tested and equity release is irrelevant to their continued payment, for example, disability living allowance or attendance allowance.
Whenever you consider means-tested benefits you should take into account that a high proportion of these are never claimed. So in assessing the impact of equity release upon your means-tested benefits you should consider what you might be entitled to rather than what you are actually receiving at the present time.
A range of means-tested benefits have conditions which mean that the amount of capital you have is taken into account and can reduce or eliminate your right to claim. The benefits which are most likely to be affected are housing benefit, council tax benefit and pension credit.
For example, except in rare circumstances, if you have more than £16,000 in capital you will not be eligible for either housing benefit or council tax benefit. There is no £16,000 limit if you get guarantee pension credit.
Pension credit works in a different way and if you have capital over £10,000 you are deemed to have extra income which reduces your entitlement. But with pension credit the position may be different if you are in the middle of an Assessed Income Period (AIP). If you are, pension credit entitlements are not affected until the end of the AIP.
The equity release issue is that whilst you own and live in your main residence the capital locked in it is not taken into account for the rules of housing benefit, council tax benefit or pension credit. But once you turn that locked-in capital into spendable cash these rules apply and you may lose benefits.
You may think that if you give away the newly-acquired capital you will get back your entitlement, but it is likely that you will be caught by deprivation of income rules and disqualified.
You should also bear in mind that benefits other than those we have identified may be affected. For example, some NHS Health Benefits (free prescriptions, dental treatment, sight tests etc) have capital limits and some benefits you receive “passport” you on to other benefits, particularly if you have not quite reached pension age.
If you are proposing to use the loan for essential home improvements it is possible that you may receive some help with any interest payments that you may make if you are on one of the following benefits:
- Income Support
- Income-based Jobseeker’s Allowance
- Income-related Employment and Support Allowance
- Pension Credit
See the Directgov website for further information.
Age UK has a useful leaflet on means-tested benefits and capital limits.
The position can be even more complex if you take into account that each of the four countries of the UK has slightly different rules.
