Equity Release Schemes
The following paragraphs explain exactly what Equity Release is, the types of schemes available, and the benefits of taking out such an arrangement.
Introduction
Some retired people find themselves with valuable properties but without any accessible capital and not enough income.
Equity release provides a way for such people to raise capital or income, from the value locked up in their home, without having to move to a cheaper property (downsizing) or letting part of their property to a third party to provide rental income.
With the increase in property prices over the last decade, many people also find themselves with a potential Inheritance Tax (IHT) liability on their death and equity release could be a suitable solution to reducing or mitigating this potential liability.
How much equity can be released from the property?
The amount of lump sum or income, which may be released, is normally based on the age(s) of the applicant(s) and will be a percentage of the value of the property.
Typically, under most arrangements, the minimum age is 60 (based on the youngest applicant on joint applications) and the percentage of the property value that could be released at that age is 20%.
The percentages available increase with age.
What types of equity release schemes are available?
There are two main types of equity release plans - lifetime mortgages and home reversion schemes, with variations of each type that can both be used to provide funds in a range of ways:
- A lump sum - which the client can spend on capital needs or invest to generate an income.
- A drawdown plan - where the client can take a lower initial sum and then continue to access equity as and when they need additional funds.
- An "income" i.e. a series of monthly lump sums - that can be level or rise in value.
- A combination of an initial lump sum and a continuing "income".
- All types of scheme can be arranged on a single or joint life last survivor basis.
Lifetime mortgages
A lifetime mortgage is secured on your property and normally lasts for the remainder of your life.
- In the case of a couple, the mortgage normally lasts until they have both died. Other events may trigger early redemption, such as you entering into long term care. You can usually redeem loans early if you wish, although generally at a cost.
- The interest on the loan generally rolls up and is added to the amount of capital outstanding.
- Many lifetime mortgages are arranged on a fixed interest basis, but variable rates are also available from some providers. Variable rates are often capped.
- The vast majority comply with the SHIP (safe home income plan) requirement that the borrower can never be placed in a position of negative equity as a result of taking out a lifetime mortgage, however long they live. As a result of the negative equity guarantee, few lifetime mortgage lenders advance more than about 50% of the current value of the property.
- The maximum loan-to-value that lenders will consider mainly depends on the age of the borrower at the start of the loan. The difference in the amount of capital and interest outstanding between a capital advance and a mortgage arrangement that produces regular or occasional drawings can be considerable. (This aspect is extremely important and should be fully explained by a Financial Adviser).
Home reversion schemes
The other main type of equity release scheme is the home reversion scheme. Under this type of arrangement, you would sell your home or a proportion of it to a home reversion company in return for a capital sum.
You remain in your home during their lifetime or until they go into long term care, but the property reverts to the reversion company after the client's death. You can set up a home reversion plan for couples or single people.
The capital sum you receive is a proportion of the full market value of the part of the property they sell to the reversion company. This rate of discount will reflect your age and sex as well as aspects of the property, such as its age and construction. Even if you sell 100% of the property, the capital sum you receive will therefore only represent a proportion of its full market value because of the long-term nature of the investment made by the reversion company.
Investments in conjunction with equity release schemes
If a regular income rather than, or in conjunction with, a lump sum is required then, rather than taking an "income" from the equity release scheme, part or whole of the lump sum can be invested in a suitable investment vehicle to produce the required level of income.
One of the most popular and tax effective vehicles currently used is an investment bond. However, based on your tax position and attitude to risk, Chartwell would be able to provide you with a product from the market place ideally suited to match your needs and requirements.
Inheritance tax (IHT) planning and equity release
Equity release can be used to help reduce or mitigate potential IHT liabilities. This approach may appeal to people who own a very substantial property that they want to keep but have relatively few other assets. There are several approaches to the problem, for example:
- Take out an equity release plan and use the capital to buy a whole of life assurance policy written in trust for the beneficiaries. There are variations on this strategy. The equity release plan could provide a capital sum or an income (i.e. as a series of capital sums). The life assurance policy could have a fixed sum assured with a fixed premium or it could be reviewable. On death, the equity release plan reduces the value of the taxable estate and the proceeds of the life policy, which is written under trust, are free of IHT.
- Alternatively, the capital from an equity release scheme could be used to buy a lump sum IHT effective plan - such as an investment bond. Many of these plans can generate an income that could be used to meet everyday living requirements, or the income could possibly be used to pay premiums on a life assurance policy gifted in trust. The equity release scheme would reduce the value of the estate and the capital gifted under the IHT plan would fall outside the client's estate after the first seven years.
The aim of these plans would be for the tax saving to be significantly greater than the costs of the scheme used.
Finally- a note of caution:
Equity release is not ideal for everybody and, thus, it is important that you consult a qualified Independent Financial Adviser for advice before considering this type of product.
There are now many more providers in the market place offering equity release schemes. As specialists, Chartwell Associates have the knowledge and expertise to provide you with the advice you need and the scheme that best suits you.
Arrange an appointment to see an adviser by emailing us at the above address or by going to the Contact us area.