RELEASING CASH FROM YOUR HOME

Transcription

1 RELEASING CASH FROM YOUR HOME As a recommended adviser for the Society of Later Life Advisers (SOLLA) we are frequently asked to advise on home income/equity release plans. These notes are designed to provide some general background to clients who are considering their options in this quite complicated area. Section Page Number 1. BACKGROUND ALTERNATIVES TO MORTGAGING OR REVERTING YOUR HOME Trading Down Sell Up Sub Let DIY Local Authority Grants Negotiate With Your Creditors INTEREST ONLY MORTGAGES LIFETIME MORTGAGES Cash Plans A Single Lump Sum A Loan Facility The Shared Appreciation Mortgage Home Income Plans HOME REVERSION PLANS EARLY REDEMPTION THINGS YOU NEED TO THINK ABOUT BEFORE YOU SELL OR MORTGAGE YOUR HOME Your Health Early Repayment Passing Assets To Your Children What About Future Needs? Children / Carers Personal Relationships Benefits Tax... 7

2 8. CONSIDERATIONS AFTER YOU TAKE OUT AN EQUITY RELEASE PLAN THE TAX EFFECTS OF EQUITY RELEASE PLANS Income Tax (IT) Capital Gains Tax (CGT) Inheritance Tax (IHT) Stamp Duty Land Tax (SDLT) THE EFFECT OF EQUITY RELEASE ON BENEFITS State Pension Credit (SPC) (Was Minimum Income Guarantee Tax Free) Disabled Persons Allowances Disability Living Allowances (Tax Free) Attendance Allowance (Tax Free) Invalid Care Allowance (Tax Free) Disabled Person s Tax Credits (Tax Free) Incapacity Benefit (Taxable) Severe Disablement Allowance (Tax Free) Funeral Payment (Tax Free) Council Tax Reduction (Tax Free) Housing Grants LONG TERM CARE (LTC) COSTS AND EQUITY RELEASE PLANS BORROWING OR REVERSION? Page 2 of 12

3 1. BACKGROUND There are many reasons a homeowner may consider borrowing on their property in later life. They may be asset rich and income poor and therefore wish to take money accrued in their home to provide lump sum or regular income to improve their day to day living experience. They may wish to help their own dependants/children with a lump sum now, rather than pay inheritance tax on the money when they die. There may be a personal need for a lump sum, perhaps the property needs improvement or a new car is desired. There may be existing debt which is draining cash flow. Whatever the reason the solution (if appropriate) is to borrow on the value of your home to meet the needs of today at the cost of the final proceeds available to the homeowner or their dependants when the property is finally sold. 2. ALTERNATIVES TO MORTGAGING OR REVERTING YOUR HOME Before anyone considers taking out a charge on their existing property it is important that they consider the alternatives, some of which are listed below: 2.1 Trading Down Whilst this is perhaps stating the obvious, anyone considering equity release should also consider selling up and buying a smaller property. Agreed the costs of moving are substantial but it can often be a far better long term solution that long term debt. 2.2 Sell Up Why have the hassle of home ownership when you can rent? Sell up your current home, invest the proceeds (or give them away and save inheritance tax if you have a good pension) and know that you will have no maintenance worries in the future. As an alternative move in with relatives. Many people dread this idea (usually the children!) however it can be a very satisfactory solution which enables children to buy a bigger property and provides security to parents in their later years. 2.3 Sub Let We have several clients who have sub let portions of their property to provide them with an excellent income to supplement their life style. Consider renting a room under the rent a room scheme. This could provide companionship plus extra income ( 4,250 pa tax free in 2015/16). Page 3 of 12

4 A further version of this option is to let out your property and move to a smaller less expensive let home thus saving the difference in cash flow (remembering of course that you usually have to pay tax on rental income and you don t get tax relief on paying rent). 2.4 DIY We have arranged several DIY home reversion plans with family members. This is a great way to provide the funds aged parents may need, provide offspring with a fantastic investment and save significant amounts of tax. 2.5 Local Authority Grants If you need to undertake home improvements and your income and capital are below 8,000 you may be eligible for a local authority grant. 2.6 Negotiate With Your Creditors If individuals above retirement age wish to turn unsecured borrowing into secured borrowing in order to consolidate debt, one has to ask whether there might be better ways of dealing with the issue. Even today s lenders get embarrassed when they realise they have over lent to people who clearly cannot afford to repay the debt and you can often negotiate terms for repayment of credit card and other debts which do not maintain the exorbitant interest rates being charged. If all else fails the individual voluntary arrangement (IVA) regime is now much less painful than it was before, meaning that you may only have to pay a % of the debts you have incurred rather than you paying 100%. 3. INTEREST ONLY MORTGAGES Many people have interest only loans and had hoped to continue same indefinitely. Changes to EU rules and the recent banking crisis means that lenders are being really strict about having these loans repaid by your retirement age. Most lenders insist on age 65 for repayment, some now allow age 70. It would be interesting to see an age discrimination case go to the EU Court of Human Rights on this (and it must change as we all work into later life) but for the time being taking out an interest only loan in retirement is not usually possible. There are some providers who are prepared to offer interest only loans to those aged over 65. These usually have the same terms as lifetime mortgages but have the option to pay the ongoing interest if required. 4. LIFETIME MORTGAGES Page 4 of 12

5 This is a loan secured on the property only available to individuals above a specific age (typically 60 to 65 and above) with the interest either being rolled up, or paid by the borrower each month. The mortgage need not be repaid until the property is sold due to the death or permanent vacation of the property by the borrower(s) (ie moving into permanent long term care). The maximum mortgage available to you will depend upon your age, your state of health, and the valuation of your property. Generally speaking, you will pay a significant premium above current loan rates so for instance currently (February 2015) you can get a five year fixed rate mortgage for perhaps 3.5%, a lifetime mortgage will be nearer 6.5%. The reasons for the higher cost is partly due to the term of the fixed rate loan (the borrower might live 25 years) and because the lender does not get any cash flow during the period of the loan so, in effect, has to cover off the cost of borrowing and the lost interest receipts for the mortgage term. Usually the loan is charged at a fixed interest rate for the lifetime of the cash borrowed. 4.1 Cash Plans Cash plans provide two main options A Single Lump Sum The lender gives you a capital sum which you do not have to repay until the property is sold (either on death or moving into permanent long term care) A Loan Facility The lender states the maximum they will lend on the property and then you draw down capital as required. Each tranche of loan will be at the rate appropriate when the money is transferred to your account, so for instance you might have a facility of 150,000 and take an initial 30,000 at 6.5% today then in 5 years time you ask for another 30,000 but interest rates have risen so the rate on that tranche is 12% pa and so on as you draw the loans down. 4.2 The Shared Appreciation Mortgage I have not come across one of these since the 1990s, however, the principle is that you borrow a mortgage equal to say 20% of the current value of your home. Rather than paying interest on your cash when the property is sold, say 30% of the value goes to the lender. As this route does not involve the sale of a portion of your property outright, it is a mortgage not a home reversion plan. 4.3 Home Income Plans Prevalent in the 1980s these plans are usually self constructed in today s market. Money is borrowed from a lender on an interest only basis. The money then purchases an immediate Page 5 of 12

6 annuity (also called a purchased life annuity) which generates a guaranteed income which hopefully repays the interest on the loan as well as a surplus for the borrower s benefit. At this time this is not an attractive option due to extremely low annuity rates. It is worth noting that if you have a lifetime mortgage and you own the property as tenants in common then when one of you dies, their share of the lifetime mortgage may have to be repaid. 5. HOME REVERSION PLANS With a home reversion plan the homeowner sells his or her property to the reversionary provider in exchange for a lump sum or income. They remain within the property thereafter as a tenant until such time as the property has to be sold (ie they die or have to go into permanent long term care). As a home reversion plan is a sale of part, or all, of the property it can generate more cash than a lifetime mortgage. The downside is you lose the future uplift in property values. Like the shared appreciation mortgage you may sell 100% of your property, but you will only receive a percentage of the value as a lump sum (say 50%). Some partial home reversion schemes allow you to revert more at a later date whilst others provide a guarantee period during which they will compensate your estate should you die unexpectedly. 6. EARLY REDEMPTION Please remember that almost all of the home income schemes provide fixed interest lending where the lender returns are linked to long term gilts. If you decide to repay part, or all, of the loan the lender will want compensation based on the costs of buying back your mortgage from the fixed rate SWAP market. Depending upon whether variable interest rates have risen of fallen at the time you want to repay you could be looking at up to 25% redemption charges (ie you borrowed 100,000 to repay it you have to pay 25,000 in penalties plus costs). At this time (August 2015) interest rates are very low and it is unlikely they will fall further so big redemption penalties seem highly unlikely, however, the risk is still there particularly if you take out a draw down loan and subsequent borrowing is at a different rate. Most home reversion companies will not allow early repayment or redemption and will insist the property is sold. 7. THINGS YOU NEED TO THINK ABOUT BEFORE YOU SELL OR MORTGAGE YOUR HOME Below we have listed some of the considerations you should address before taking the plunge with a lifetime mortgage or home reversion plan. Page 6 of 12

7 7.1 Your Health If you are in poor health you may be better off to consider other alternatives such as borrowing from your children. A home reversion is a sale of your property. The actuaries of the institutions allow for a normal lifespan when calculating their rates so you would be getting a poor deal. 7.2 Early Repayment If you are likely to want to move in the next few years you may end up with a significant early redemption penalty on the mortgage of up to 25% of the amount borrowed making the equity release mortgage a very expensive proposition. 7.3 Passing Assets To Your Children If you want to pass on assets to your children then clearly an equity release plan will reduce the ultimate inheritance. If your children have the means it could be much better to borrow from them or sell them the property. This creates a charge on your estate and ensures they do not lose out on the rising value of your property. 7.4 What About Future Needs? Are you trying to resolve a minor problem now, only to prevent your ability to support yourself properly in 10 years time? Would it be more sensible to downsize rather than mortgage your current home? 7.5 Children / Carers Do any of your dependants live in your home? Will they need a roof over their heads when you die? Clearly, if you have an equity release plan the property will have to be sold. 7.6 Personal Relationships What happens if one of you dies? If you are single what happens if you marry / live with someone? What happens if you divorce? As anything seems possible nowadays what happens if you have more children? 7.7 Benefits Are you in receipt of any means tested State or Local Authority benefits? Taking out an equity release plan will almost certainly affect your entitlement. 7.8 Tax Most equity release products will generate taxable income which will increase your tax burden and reduce the benefits of the whole process. Page 7 of 12

8 8. CONSIDERATIONS AFTER YOU TAKE OUT AN EQUITY RELEASE PLAN. There will be no change in your liabilities of ownership. You will still have to: pay your council tax; maintain the property in good order; keep the property insured; Not fall foul of the Planning Acts or Local Authority regulations. You will not be able to sublet the property without the lender s prior consent (it will not be given for a home reversion) and you will have to notify the lender of anything which may significantly affect the value of the property. You are not allowed to carry out substantial work on the property without the lender s consent. 9. THE TAX EFFECTS OF EQUITY RELEASE PLANS An equity release plan impacts on a number of taxation areas. 9.1 Income Tax (IT) The lump sum will be invested and that in turn will generate taxable income (or the recipient may choose an income plan). If the recipient does not pay tax now they may start to pay tax in future. If the recipient was in receipt of age allowance this may be reduced at a rate of 50% for each pound received over 27,700 income pa (2015/16). It may push the recipient into a higher rate of tax. 9.2 Capital Gains Tax (CGT) Other than perhaps investing the equity release lump sum to generate gains and use the annual CGT allowance ( 11,100 in 2015/16) this tax should not affect an equity release decision (although look at my comments concerning undertaking a reversion to your dependants). 9.3 Inheritance Tax (IHT) Equity release can be a brilliant IHT planning tool. One does, however, have to be wary of associated operations when considering lump sum gifts linked to reversions to family members. Page 8 of 12

9 Certainly, if a home reversion enabled an individual to raise their net income substantially then they could gift out of income substantially more each year than the 3,000 personal allowance ( 6,000 per couple). If lump sum gifts are made to children well in advance of any family reversion then once 7+ years had elapsed those gifts would fall out of account. Likewise, a reversion of 100% of the property only leads to say 40% to 60% of the property value by way of a lump sum. Better the children pay 18% / 28% CGT tax rather than 40% IHT. Remember, that the beneficial IHT effects of a reversion are instant, no need to wait for 7 years (or 2 years for a business proposition). 9.4 Stamp Duty Land Tax (SDLT) This should not affect equity release as the purchaser pays it, however, care needs to be taken where partners are not married and there is a mortgage valued in excess of 125,000. Likewise a reversion to a family member would create a tax liability. 10. THE EFFECT OF EQUITY RELEASE ON BENEFITS 10.1 State Pension Credit (SPC) (Was Minimum Income Guarantee Tax Free) SPC is paid to those above state retirement age. It is designed to top up your pension income to a minimum level. For single pensioners the target income is a week (2015/16) and for couples the figure is per week. Where a claimant has in excess of 10,000 of savings it is assumed that every 500 generates 1 a week. So if you have 15,000 of savings it is assumed you are getting income of 10 a week. If you have private income of over ( as a couple) then you can claim an extra per week benefit ( for a couple). Whilst the calculations are complicated at it s simplest the maximum benefit is: Single Couple State pension Pensions Credit Maximum Top Up More of less can be paid according to circumstances. SPC is a genuine safety net which our clients should not need to call upon, however, the relevant issue for equity release plans is that income from equity release will affect the guarantee and if a lump sum is taken then for every 1,000 of savings above 10,000 they will be treated as receiving 104 a year in income. Page 9 of 12

10 This benefit will cease for new applicants when the universal pension starts in 2017 at 150 a week in 2015 terms Disabled Persons Allowances These benefits can be increasingly difficult to claim successfully Disability Living Allowances (Tax Free) Are not means tested and will pay out care and mobility elements as long as you are not on other means tested benefits Attendance Allowance (Tax Free) This benefit is paid to you if you need help with personal care or you require supervision to avoid danger to yourself. You must be sixty-five years old or over to claim Attendance Allowance. The benefit is paid at one of two rates a lower rate for those who require care either during the day or the night and a higher rate for those who also require care day and night. The benefit levels are usually reviewed in April and the payment is made directly to your bank account. Anyone in a nursing home should qualify for Attendance Allowance and many in later life also benefit. There are two levels of benefit dependent upon the degree of help needed current rates (2015) are per week at the lower rate and per week at the higher level. Attendance Allowance and its equivalent benefit for pre retired people (dependants living allowance or DLA prior to 2013, Personal Independence payment post 2013) are not taxable and do not affect means tested benefits Invalid Care Allowance (Tax Free) Means tested to savings and income Disabled Person s Tax Credits (Tax Free) Is means tested to income and savings and you have to have enough national insurance (NI) credits to qualify and you have to work 16 hours a week Incapacity Benefit (Taxable) Is subject to sufficient NI contributions and only paid to age Severe Disablement Allowance (Tax Free) Ceased in 2001, not means tested and only available to existing claimants Funeral Payment (Tax Free) Page 10 of 12

11 The one off State benefit to defray costs of a funeral is means tested in a similar way to the other benefits Council Tax Reduction (Tax Free) This is a Local Authority benefit so the rules will vary however generally speaking if you have more than 16,000 of savings you cannot get it unless you are receiving pensions credit or income support (which you would not get with more than 16,000 savings anyway). Strangely, if you are married you cannot get a second person s benefits but if you are cohabiting you can. The benefit is progressive, but can be up to 100% of your council tax bill which for some is the biggest bill they have. Obviously, if you undertake an equity release and end up with more than 16,000 it could be a disaster from a council tax perspective Housing Grants Again, these are a Local Authority benefit. They are available for property repairs, improvement, conversions and to assist the disabled. They are provided (subjectively between authorities) according to income assets, needs and outgoings. Clearly, if you do an equity release you will stand less chance of receiving these grants. Suffice to say if you are eligible for any of the means tested benefits now, you are unlikely to still qualify after undertaking an equity release plan and you must weigh up the cost of losing benefits against the benefits of equity release. 11. LONG TERM CARE (LTC) COSTS AND EQUITY RELEASE PLANS We have separate notes on the cost of long term care however for the purpose of this guide it is worth highlighting the fact that the Local Authority usually offers (not always!) a deferred payment scheme for nursing and residential care home fees which would (currently at least) be interest free rather than commercially charged. Since the Care Act 2014 the Local Authority has to offer such schemes but can charge interest at above inflation rates. Clearly, if you have sold your property then that asset is not available to the Local Authority. If you have sold the property on a commercial basis then it should not matter (but this has not been tested) whether you have sold it to an institution or your children. So, one can see an added advantage to a family home reversion scheme planned well ahead of any LTC needs. On the other hand by undertaking an equity release plan may have to pay all the costs of LTC whilst at the same time you receive no means tested State benefits until your equity release proceeds run out. Many home reversion plans insist your property is sold if the last occupant goes permanently into a nursing home and there would seem little point in allowing a mortgage to roll up under the same circumstances. 12. BORROWING OR REVERSION? The following is a quick guide to the two alternatives: Page 11 of 12

12 Borrowing You get a smaller payment You may lose means tested benefits You retain ownership of your home You can choose from different interest options Cash received can be used for any means Can (rarely) pay interest or defer same Can repay loan Can stay in home until unable to do so Can (usually) transfer to a new home May be able to sub lease property Keeps increasing value of property in estate Escalating debt on estate (roll up mortgage) Can use drawdown Can (usually) take out second loans Reversion You can get a larger lump sum You may lose means tested benefits You sell your home and become a tenant No interest to pay as you have sold your home Cash received can be used for any means No interest to pay as you have sold your home Cannot (usually) buy back property Can stay in home until unable to do so Cannot (usually) transfer, you cannot move home Never able to sub lease property Loses all of property value from estate Loses all of property value from estate Can sell property in stages Cannot take out further loans as property sold Please note that whilst every effort is made to ensure that the information contained within this explanation is correct, these notes are by necessity brief and of a generalised nature. Clients should seek specific personalised advice prior to undertaking any arrangement. These notes were last updated in August Whilst we have done our best to ensure they are current to this date laws and options are changing constantly so always check before action. E.&.O.E. Page 12 of 12