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Frequently Asked Questions
Equity Release:
Doesn't it reduce future inheritances?
Certainly the interest rolled up on Lifetime Mortgage schemes
(or reduction in the value of the portion sold, plus any share of
future increases in value in a reversion scheme) will reduce the
estate's value and this is why we suggest you talk it over with
your family. However, as many people are finding, it can allow you
to enjoy helping family members during your lifetime - possibly to
help grandchildren buy they're first home.
With a lifetime mortgage, if you live a long time or house prices
fall, there may be no equity left for your heirs to inherit.
Also for those whose estate (including the home) exceeds the level
of inheritance tax (£275,000 - 2005/6) it may also reduce, possibly
even avoid the estate being liable for any tax (40% of everything
over £275,000). Indeed some of the lump sum realised from equity
release can even be invested in trust for your children, so that
growth made on it would normally fall outside of your estate for
tax purposes. However, as the rules on Inheritance Tax are liable
to change and equity consumed by any equity release scheme may
exceed any Inheritance Tax savings made, we strongly suggest that
Equity Release should not be considered solely as a means of
mitigating Inheritance Tax but only if there are other more
immediate needs to raise money.
Will it affect my benefits?
Yes. Any income or capital generated will affect any means tested state benefits you may be entitled to and may even mean you loose them. As such it should only be considered after checking with the Benefits Agency, Citizens Advice Bureau or Local Authority and you are happy that the benefits gained outweigh any loss.
Will Equity Release prevent me moving?
No. Most schemes allow you to move. However, if you move to a smaller property, to avoid a loan representing an irresponsible percentage of your new home, you may be asked to repay some of the original loan, to keep the new loan in proportion to the cheaper property. If so, this would normally come from the profit made on moving. The right to move is subject to the provider's approval and depends upon there being sufficient equity remaining to afford the new property.
What happens if I need Long Term Care?
If time comes when, one applicant in joint cases requires professional care, the other applicant still retains the right to live in the home and the plan continues. In the case of a single applicant needing to move into a Residential or Nursing Home the house is sold and the provider repaid. The amount repaid would normally reduce the value of the home in any calculation of assets used by the Local Authority when assessing your ability to pay. From April 6th 2005 anyone living in England with assets over £20,500 (2005/6) will need to pay for their own care until assets fall below £20,500. This leads to further erosion of your estate. You could, however, use some of the equity released to purchase a Long Term Care protection Plan which would help provide for such care costs.
Can I pay off the loan?
Any specialist Equity Release plan should be seen as a life-long
plan. However, should you come into money or want to sell your home
without buying another (in the UK), most Lifetime Mortgage schemes
or interest only mortgages will allow you to pay off all or some of
the loan, but you may need to pay an Early Repayment Charge in the
first 5 years although with some specialist schemes, this may be at
anytime. You may therefore, prefer to invest the money or put off
selling until such time as the penalty period no longer
applies.
Under a Reversion scheme you may be able to buy back any share
previously sold to the company but it would be at their discretion
and would cost you the same percentage of the property, but based
on market value at the time you paid it back, and not the value of
the property when you took out the plan originally.
Are there any properties on which you cannot release equity?
Yes...
- Properties not on mainland UK.
- Properties worth less than £40,000 would not be attractive.
- Leasehold properties where less that 75 years of the lease remain, or when the property is part of a trust.
- Freehold flats may also be unsuitable. As might some former council houses and one bedroom properties to some lenders.
- Some companies will not lend on properties already owned under "Tenancy in Common".
Should your property fall into one of the last three, we may still be able to find a suitable lender.
What About Taxation?
The lump sum produced from releasing equity via a lifetime
mortgage or reversion scheme is free of both Capital Gains Tax and
Income Tax. Should, however, you put the money into a deposit
account you will be taxed on the interest you receive from it. If
you wish to invest some of the equity released for income, we can
offer you advice on how to achieve this tax efficiently.
The income produced by a reversionary scheme is normally provided
by an annuity. This allows a percentage of each income payment to
be regarded as a return of the capital used to purchase it, and
therefore tax-free. The balance however, is deemed as interest and
is taxed at source at 20%, unless the income together with your
other income does not make you liable for tax when it could be paid
gross. Higher Rate taxpayers would have additional tax to pay on
the annuity's income
Couldn't we just borrow money to help us?
Yes. Even when retired, banks and building societies will offer loans and even interest only mortgages. You should bear in mind that the repayments will increase your outgoings per month, and so add further pressure to balancing the budget. Alternatively, some of your family may even be prepared to lend you money. Whilst this latter option should be the cheapest, many people decide not borrow from their family, preferring instead to profit from their own shrewd investment.
Why not release capital by moving to a smaller property?
For those with large detached properties, moving to a smaller
property could release considerable equity. Also for those who are
willing to move from their own area to a cheaper one, considerable
equity may be able to be released. In either case, moving would
normally provide the cheapest option.
However, if you prefer not to move away from family and friends,
or have a typical three-bedroom semi you may find that moving to
somewhere smaller, especially once the costs of estate agents,
solicitors and removals are taken into account, may not release
sufficient equity
Could we generate extra income by renting room in our property?
Whilst this can produce valuable extra income and provide companionship, you may find your need is more for a lump sum or you may simply prefer not to share your home with a stranger.
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