Melinda Giles, Giles Wilson LLP. Equity release

Transcription

1 Melinda Giles, Giles Wilson LLP Equity release

2 Introduction My aim today is to demonstrate the value of private client practitioners when it comes to property transactions Having different departments dealing with related services, such as conveyancing and elderly client advice, can lead to gaps in the advice given to clients

3 What is equity release? Unlocking the equity value of a property to use as cash Three ways to release equity from a property: Selling and downsizing Equity release scheme Entering into an arrangement with other people (family)

4 Why is equity release important? Many older clients struggle with cashflow Older clients are living longer and looking for ways to enjoy their later years More elderly clients own property now than ever before

5 Commercial equity release. Two types of scheme available to homeowners aged 55 and over: Lifetime Mortgage: Similar to a conventional mortgage. 98% of commercial equity release schemes are Lifetime Mortgages Home Reversion Plan: Less popular but require more considered advice

6 Negative press an example. In 2009, Andrew Castle s parents-in-law borrowed 70,000 against their 500,000 home In 2015, the couple decided to move house and pay off the loan. It had increased to 98,000 over 6 years, making their total cost 70, ,000 = 116,000 Andrew Castle said: This is about elderly and vulnerable people being taken advantage of It is not human.

7 Regulation. Andrew Castle s parents-in-law were fortunate as they were moving when house prices were high I calculated their house price to be 648,785 in 2015, compared to 500,000 in 2009 To avoid regular complaints of this profile, equity release is subject to stricter regulation by the FCA and SHIP (Safe Home Income Plans)

8 How we can help. Part One: The equity release can be dealt with by conveyancers Part Two: Private client solicitors should be involved when the SHIP certificate needs to be signed Critical advice for clients: The interest on their borrowing will compound

9 Illustration: 70,000 loan at 6% p.a. rate Loan 70,000 1 st year interest 4,200 74,200 2 nd year interest 4,452 78,652 3 rd year interest 4,719 83,371 4 th year interest 5,002 88,373

10 The client needs to understand: The impact on Inheritance Has the client discussed the loan with his/her beneficiaries? Many clients don t have Wills. Welfare Benefits Pension Credit, Income Support and help with Council Tax could be affected. Full-time care If the client moves into full-time care the property must be sold and the loan repaid The alternatives

11 Case study: Jim, 76, new client, two sons (Paul and Martin) Jim s eldest son, Paul, asks his father to release capital from his property Paul runs his own business but is unable to raise any more money from the bank or his own home Jim wants to borrow 50,000 ( 45,000 for Paul, 5,000 for Martin). His property is valued at 230,000 Jim s Will splits everything between his two sons Jim is aware the loan could cost up to 180,000 to repay

12 Where Private Client advice should come in Most equity release cases involve the elderly mother/father selling their property and moving in with their son/daughter We are often only consulted when things go wrong Written declarations of the practical and financial arrangements should be made before sale of property Conveyancing teams should be referring the elderly mother/father to the Private Client team for advice

13 Case study one: The Grandpa Annexe George is a widower. He has a son in Surrey and a daughter in Australia. His son suggests selling his house and moving into a new annexe at the family home in Surrey His annexe will have its own front door and telephone, and an adjoining door to access his son s home Everyone genuinely believes that this is the best solution as George approaches his later years

14 The Grandpa Annexe: What could go wrong? George s son and daughter-in-law divorce. They sell their house. How much does George get? George s son loses his job and cannot pay the mortgage. What mortgage? What happens to George? George develops Alzheimer's. He becomes a risk to himself and moves into a home. What is his financial situation? George dies without making a Will. What is his estate? How is his share of the property defined? What about his daughter?

15 Let s backtrack. What advice would we give George? Document everyone s intentions before any money is spent on the new annexe Gift: Risk of being homeless, deliberate deprivation of assets/estate. Inheritance Tax? Investment of funds: Extracting and protecting George s share. Terms of son s mortgage? Terms of planning permission for the annexe Paying bills: Insurance, council tax, food costs etc. How will these new arrangements affect George s Will?

16 Case study two: A home for life Pam is a widow with 5 children. Her youngest, Susan, and her husband, Tim, offer Pam a room in their home Pam gives up her protected tenancy and, out of kindness, makes a Will leaving all her savings to Susan and Tim But Pam dies suddenly. All her savings are left to Susan and Tim, even though Pam has only lived with them for 9 months

17 A home for life: The risks for Pam In this situation, it is likely that Pam had no more than a Bare Licence to live at Susan and Tim s Pam could have been evicted at any time without notice Giving up her protected tenancy means she deliberately made herself homeless She paid no rent and had no exclusive right to the property These uncomfortable living arrangements made her very vulnerable

18 Case study three: A big house by the sea Tony and Sue are retired. Their daughter, Charlene, and her husband suggest they all sell up and move into a large house on the coast Both couples sell their homes quickly and Tony and Sue temporarily move in with Charlene and her family Charlene s mortgage broker suggests not mentioning her parents when applying for a new mortgage The conveyancer does not pick up on the large cash contribution to the purchase of the big house by the sea Tony and Sue ask to collect their Wills from their solicitor

19 A big house by the sea: What could go wrong? Charlene and her husband decide to borrow money against the new house to extend it Tony and Sue are registered as Joint Tenants rather than Tenants in Common There is no agreement in place concerning maintenance of the property, insurance and bills What if the two couples don t get on as well as they thought they would?

20 In conclusion: Commercial Equity Release schemes Our overriding duty is to provide elderly clients with independent, objective advice We should remind our conveyancing colleagues to be aware of any undue influence or coercion We should be mindful of The Law Society s guidance and recent note on vulnerable clients If we do not, we risk being implicated in arrangements that are not in clients best interests