Equity Release

LarryR

Hey all

I know there's been quite a lot of posts about equity release on here, but couldn't find one that matched my circumstances, so thought I'd post...

My mother-in-law has a flat worth about £400k, with no mortgage. She would like to release some of that equity (to pay for a live-in carer or anything else she wants) but not through an equity release company, rather through her two daughters.

Someone told me that there's a way for her two daughters to buy the flat from her for under the market value, say £250k, thereby releasing some of the equity for her. She would then continue to live in the flat, but when she dies (in 2 years or 20 years) then the daughters would be able to sell the property at market value.

Does any of this make sense? Or has my friend got the wrong end of the stick? I can't find any information on this, but then I don't really know what to search for.

Thanks for any advice.

Larry

Annisele

Do the daughters have £250k in cash?

If they do, then it might be better for them to lend their mother the £250k secured on the house (essentially a private mortgage). The interest rate could be whatever they want, but if it's not zero then the daugters will have to pay tax on the interest.

If the daughters buy all or part of the house, then they could end up hit with capital gains tax when they sell. They won't have been living in the house, so they won't get the relief that a homeowing occupier gets.

Mojisola

Annisele wrote: »

If the daughters buy all or part of the house, then they could end up hit with capital gains tax when they sell. They won't have been living in the house, so they won't get the relief that a homeowing occupier gets.

And the sisters will be landlords and will have to comply with all the regulations regarding their tenant.

And if mother continues to live it, the house will still be counted as part of her estate when she dies so inheritance tax is something else to consider.

LarryR

Thanks for the quick replies.

If they lend the mother £250k, why do they need to secure it against the house?

I thought there would be a financial advantage for the two daughters in buying the property at a reduced valuation (offset by the potential of having to tie the money up for a long period, if the mother survives for a considerable number of years), and an advantage for the mother in the release of some money for her, resulting in a win-win for both parties?

As it stands, the property would form part of the mother's estate when she dies and the two daughters would have to pay 40% inheritance tax on everything over £325k? Not sure what would happen to the £250k loan in the event of her death?

davidmcn

LarryR wrote: »

If they lend the mother £250k, why do they need to secure it against the house?

They don't need to, but it's fairly trivial to do and is generally a sensible way of protecting their interest.

As it stands, the property would form part of the mother's estate when she dies and the two daughters would have to pay 40% inheritance tax on everything over £325k?

As above, it would count as part of her estate if she retains an interest in it.

Not sure what would happen to the £250k loan in the event of her death?

It's payable from the estate, like other debts (Inheritance Tax is payable on the net value of the estate).

Annisele

LarryR wrote: »

I thought there would be a financial advantage for the two daughters in buying the property at a reduced valuation (offset by the potential of having to tie the money up for a long period, if the mother survives for a considerable number of years), and an advantage for the mother in the release of some money for her, resulting in a win-win for both parties?

I don't see an advantage to the daughters there. If they'd inherit the house anyway, they can either pay £250k now, or wait and get it for free.

I do see an advantage to the daughters in the mother leaving the entire house to them (i.e. not going the equity release route). Whether they do that by lending the mother a lump sum, or lending her money on a monthly basis, or in some other way, depends on everybody's circumstances.

The reason the daughters' payments are better as a loan rather than a gift is IHT. If the daughters give the mother £250k and then she dies the next day, all the daughters have done is increase their IHT bill by 40% of £250k. If they lend the money, then the loan is repaid first. (You do need to document the loan properly though - HMRC is wise to people saying there's no IHT due because my parent owed me £100ks).

Brock_and_Roll

Any sale at significant undervalue like this is highly likely to be spotted should the lady ever need means-tested benefits such as council funded long-term residential care. See rules on Deprivation of Assets.


Not a deal killer, but something that needs to be borne in mind.

magpiecottage

I would say that getting a loan secured on the house makes sense. Firstly, it would be evidence to HMRC that there was a genuine debt on the property - and that the money belonged to the daughters.

There is, though, another issue. If the mother goes into care, and assets she has will be used against any local authority contribution to the cost.

They need to consider how that would work out - on the one hand, the council may want a share of the sale value to meet that cost. On the other, if the daughters lend the money, they may argue that she has cash in hand available to meet her own care costs.

davidmcn

Also the additional rate of SDLT would apply for a purchase (assuming either of the daughters owns other property).

LarryR

Thanks again for the responses.

So is there no equity release scheme that can be used here ... ?

Annisele

If the daughters already have the cash, it doesn't sound as though you're really looking for an equity release "product" as such. It sounds like you're just looking for an agreement between the daughters and the mother. Try a local solicitor to start with.