WE covered some of the mis-selling practices of equity release last week. Let’s look at where the possibilities lie.
For some, equity release is a great idea, for a salesman looking for a commission, it can be ‘made’ into a good idea. Over the next couple of weeks, I’ll give you a good run down of all the thoughts, risks and benefits around whether or not it could be useful for you.
The largest concentration of wealth ownership in the UK with £1.11 trillion of net housing wealth, is the 55-64 age group. The 65-74 age group is just behind that at £1.08 trillion.
Over the years the property values have rocketed, leaving some families asset rich and income poor, but also with inheritance tax issues they hadn’t bargained for.
The average equity release in 2022 was for over £135,000 with the primary goal of home improvements, and medical costs came next. Supplementing retirement income, paying off debts, long term care costs, helping children or grandchildren or just improving living standards and lifestyle, pretty much summarises the other reasons home-owners opt for an equity release plan.
Things to consider before you look at equity release for home improvements: talk to your local authority to see if you are eligible for any grants, particularly with making your home more sustainable and energy efficient. Why borrow when the money may be already available? A full insulation plan is a great starter and benefits you financially just as much as it makes the home more comfortable. There is nothing more inefficient than turning the heating up and still feeling a cold breeze around your wee toes.
If you retain the heat, you can turn down the heating, saving costs, and that eats into the monthly costs of the improvements. But start first with the local grants.
Clearing debts is a big problem. If they are unsecured and you add to your equity release mortgage, remember they are now secured against your home. There are 1.9 million people who opted for an interest only mortgage, many of which have little options available to them when they reach the end of the term, but where lenders insist the debt is repaid. Equity release is an option here to repay the existing debt, which takes away the need for repayment as the loan will then roll up and be repaid on the passing of the home-owner.
Notwithstanding the issues above with taking unsecured debt and making it secured, there is the obvious point of reducing the interest charges of certain very helpful credit cards. Debt at 23 per cent virtually doubles each four years whereas the best equity release rate available today is just 6.1 per cent, saving you nearly 68 per cent over each of those five years.
I can see the attraction, but consider the other options first. Personal loans and secured loans are available at a similar rate which will reduce the interest cost. The loan has to be repaid on a month-by-month basis however, and that adds to the monthly budgeting and costs. The term of the loan can be extended to keep contractual costs down however, allowing you overpayments when you feel flush.
For those using equity to help their children or perhaps their first house purchase, remember that each gift has a seven-year rule attached to it for inheritance tax. So, it becomes a potentially exempt transfer, and after seven years, the gift is fully outside the estate.
However, there are annual exemptions of £3,000 per donor. So, a gift from each parent of £3,000 equates to £6,000, you then have the previous year’s exemption if not used, so we are now at £12,000, and if the gift is coinciding with a marriage, each parent can gift a further £5,000. This takes the total to £22,000 that can be gifted free of inheritance tax in that year. Remember the gift has to be in consideration of the marriage, ie before it. All gifts after that are added to the seven-year rule.
Using equity release is a very good way to reduce your estate for inheritance tax, however. If you release the capital, it is now a debt against your estate which reduces the estate and the debt roll up reduces the estate further. When you release the capital, this needs to be gifted into trust or other form of Inheritance tax planning, which in time takes it outside the estate, thereby reducing your estate, and the growth on that is outside the estate.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. More next week, but if you have any questions or would like advice on equity release, get in touch with Pat Greene on pgreene@wwfp.net or call 028 6863 2692.
