Parents want to release equity in house- advice please

redbabe

Apologies if this has been asked before. I have done a search but not found the advice I’m hoping you can provide. I'm not even sure if this is an appropriate place to ask but

My parents are now pensioners and live in their own home – a terraced house which at todays house prices is worth approx £125,000. They downsized from a semi detached 2 years ago, paid off some debts and bought this terraced house and so have very little actual cash left from the sale of the semi detached.

Their problem is that they only receive a state pension but would ofcourse like to release the rest of the cash from the terraced house in order to increase their income. They have a real thing against renting and have looked into equity release which again they are not keen on.

My siblings and I (there are 5 of us) have been talking about buying the house between us for our parents to live there. A couple of my siblings are concerned about the tax implications of doing this as three of us earn over £30,000 per annum and all of my siblings already own a house (as a home) – I am the only one who doesn’t own property.

My questions are

How does owning more than one property (even if it is a fifth of a property) impact on the amount of tax that you pay?

If we bought the house what are the tax implications if my parents paid us rent to live there? Is it some kind of inheritance tax?

Is there anywhere else I could find more information/advice?

Has anyone else been in this situation and found a solution?

My brother has said that he’s heard of people setting up a company to purchase the property – I assume this then doesn’t impact on personal tax liabilities. Does anyone know anything about this?

Our ideal would be that all of us (the children) buy a fifth of the property but if the tax implications for some are too restrictive would there be implications to me buying the house? – bearing in mind that I don’t own any property.

Thanks in advance for any advice you can give to me

margaretclare

You don't say how old your parents are, but we did equity release in 2003 when one of us reached 68. The most we could release at that time was 25% which was enough to pay off the mortgage - problem solved, for us.

The rest of your post sounds complicated and I really can't comment on it - your mention of equity release was the only thing I have any practical experience of.

We were warned that there might be an impact on any means-tested state benefits from the equity release, but as we weren't on any that didn't bother us.

HTH

Margaret

Melissa177

Reading your post, I'm thinking two things:

1. Even if your parents release 100K of equity from their property, that isn't going to last them that long. They obviously like to spend money, and so they might want to look at reducing their outgoings.

2. Buying their house is a nice idea, but I would find it really odd if my parents asked me to buy their house off them so they could spend more money. I'd wonder why they hadn't planned for their pension, and were expecting me to bail them out. Fine if you actually want the house and think it's worth it, but what if it drops in value in the future?


Have they thought about doing some work to increase their income? Behind the counter at a local shop or something like that?

RabbitMad

Melissa177 wrote: »

Reading your post, I'm thinking two things:

1. Even if your parents release 100K of equity from their property, that isn't going to last them that long. They obviously like to spend money, and so they might want to look at reducing their outgoings.

2. Buying their house is a nice idea, but I would find it really odd if my parents asked me to buy their house off them so they could spend more money. I'd wonder why they hadn't planned for their pension, and were expecting me to bail them out. Fine if you actually want the house and think it's worth it, but what if it drops in value in the future?

I don't see the evidence for conculsion 1 (liking to spend money). If they released £100K of equity that is equivalent to approximately 20 years worth of a state pension.

I don't think its that odd that the parents want to be looked after. It is the natural order of things one generation raises their young whilst looking after their old. The other alternative would be that they came to live with one of you giving you the house in return.

There is nothing wrong with the 5 of you clubbing together to buy the property (if you can afford it) and letting your parents live in it rent free. The only issue would be CGT when you come to sell if it has increased significantly in value.

I would love the chance to buy my parents property off them if it helped them retain their independance in their later years and provide them with a much needed income.

Personally I think equity release schemes should be avoided if possible. They are companies in business to make a profit and will want to profit from your parents much more than you would.

margaretclare

They wouldn't be able to release £100K of equity in a property worth £125K. That's 80% of its value, and I've never heard of that amount of release being possible.

The OP doesn't say that the parents want to be looked after. You may not think it's odd, but I do. Hell will freeze over before I ask or expect any of the younger generation in my family to 'look after' me, and if you asked DH about his family, he might give you an even more forthright response. When we did equity release we were urged to inform our families because 'it might reduce their inheritance'. We duly informed them all of what we proposed, and not one of them was in the least bit interested.

I would also not want to live in a house that someone else owned, even family members. I'd feel 'beholden', as my grandmother might have said.

We're quite happy with what we did. At least we no longer have a mortgage to pay, which would have continued until we're 83. We didn't actually do it because we wanted more money to spend, but now we do have the amount that was going in mortgage repayments, which would have been nearly £300 a month since interest rate rises.

Margaret

franklee

Hi margaretclare,

How does the plan you've got work. Does the interest owed on the money you borrowed accumulate and is than paid back if the property is sold or you pop your clogs?

I'm curious what happens if you needed to move into a nursing home or what happenes when one person pops their clogs and the other continues living in the house.

Also, roughly, what interest rates are charged? Are you kept informed of how much is owed. What if you live years, or house prices fall and the amount owed is more then the house is worth Or is at a percentage of the house that you owe.

It's just I've heard such bad things about these schemes I'm curious what the real story is from someone who as done it.

Thanks, Frank.

margaretclare

Hi Frank

How does the plan you've got work. Does the interest owed on the money you borrowed accumulate and is than paid back if the property is sold or you pop your clogs? Yes.

I'm curious what happens if you needed to move into a nursing home - well, then it would be sold, after personal items and family stuff was removed by people to whom it rightfully goes.

or what happens when one person pops their clogs and the other continues living in the house. It can continue as now until the survivor no longer needs it. In practice, neither of us wants to stay here in that event - the memories would be just too painful. I have thoughts of what I might do in that event, DH has different thoughts. But whenever we move from here, we sell, the lifetime mortgage gets paid off.

Also, roughly, what interest rates are charged? It is capped at 7.99% and has reached that now with the 5 interest rises of recent months. It will never rise beyond that point.

Are you kept informed of how much is owed? Yes, we get a yearly statement. We have the option to pay the interest if we choose, keeping the amount borrowed at the same level. I'm in favour of doing that. DH isn't. He's not in favour of leaving anything behind him.

What if you live years, or house prices fall and the amount owed is more then the house is worth Or is at a percentage of the house that you owe. We are guaranteed to live here for as long as we want to and never be in negative equity. That's part of the agreement regulated by the FSA, along with the capped interest rates.

It's just I've heard such bad things about these schemes I'm curious what the real story is from someone who has done it. Understandably. The schemes are now regulated by the FSA - a few years ago they weren't.

Your best bet is to look up the SHIP website (safe home equity plans) [SIZE=-1]www.ship-ltd.org/ which answers most of the questions.

I must emphasise, we only did it because we didn't fancy going on paying a mortgage until we were 83, just in time to die and leave it to someone else. It was £260 a month in 2003, would be more now with all the interest rate rises. We didn't actually need more income, that wasn't why we did it. [/SIZE][SIZE=-1]We could see pleasanter uses for the money, and in fact, we're both still saving! [/SIZE][SIZE=-1]It was also an opportunity to put the whole thing into both our names - prior to that it had been in mine alone, I took out the original mortgage back in 1990, my first husband couldn't be involved in it then because his health was too bad and in fact he only survived 18 months after we moved here. I was redundant, I had mortgage arrears, you name it....When I remarried I wanted it all in both our names.

HTH

Margaret
[/SIZE]

margaretclare

Hi Frank

Just to add further to what I wrote yesterday, I think there may be few people of our age who are contemplating a mortgage into their 80s. Although there are some, apparently, who continue a mortgage beyond the official 'retirement age'.

I took on a £45K mortgage in September 1990 to buy this £58K (then) 1930s bungalow. It was interest-only, and the idea was, a PEP was set up to run alongside it which would eventually pay off that mortgage in 15 years' time. Coincidental with widowhood I was made redundant 18 months later. So that plan didn't work. I didn't want to be repossessed once the 15 years had expired in 2005, by then I had remarried and retired, we could afford the mortgage repayments if we went to a repayment as opposed to an interest-only one, but as I said earlier, we didn't see the point of busting a gut to pay for something which would eventually belong to someone else.

This little place was valued at £140K in 2003. It's now valued at approx £175-180K. So even with the interest rolling-up on the lifetime mortgage, we still have equity - but not too much, not enough to have to worry about IHT.

It has worked for us - it may not work for all. We were warned (a) there may be an impact on means-tested benefits and (b) there may be an effect on any inheritance you hope to leave behind. Neither of these considerations worried us at all, but they may loom large in some people's thinking. Everyone should do their own research, not leave it to their sons/daughters to do, and everyone must make their own choices and decisions, unimpeded by what others might think they should do.

HTH

Margaret

redbabe

Thanks for your comments so far.

To put things in context.

Without going into the whole of my family history my dad had a bad accident at work when I was young. He received no compensation and all my parents savings (up to that point) were used up trying to hang onto their house as he was not able to work for years. Not everybody in this country has a well funded retirement in fact unless the stats have changed in the last few years, I was always told that pensioners were the second biggest group in poverty in the UK. Personally I do not see a problem with supporting my parents - its what children should do isn't it?

We just want them to be able to be comfortable and not have to worry about money - it seems crazy to be sat on £125,000 but struggle to pay bills or go for the odd pint.

margaretclare

Hi redbabe, I hope you don't think I 'have a well-funded retirement'.

My first husband didn't work from 1976, died in 1992 coincidental with my redundancy. 1992 to 1997 I did any menial job I could find, that was from my mid-50s to early 60s. And as I wrote earlier, I had a mortgage to pay. Since meeting my (now) second husband, he hadn't a 'well-funded retirement' either because of repeated redundancies and 2 expensive divorces. We do all right, though, we have all we need, but I've no idea how it has come about.

I think your statement that 'pensioners are the second biggest group in poverty' should be qualified with the word 'some' pensioners. The poorest people now are those older women who retired without any kind of pension provision, often widows living alone. AgeConcern puts them at 1 in 4 of the retired population. It's not true at all that 'all' pensioners are in poverty. While I don't consider us to be rich, I certainly wouldn't put us down as 'poor'.

Have your parents claimed all the state benefits they are entitled to? Pension credit, perhaps attendance allowance for your Dad, depending on his state of health at the moment? This is £64.50 a week top rate, and is definitely worth having.

Have they considered selling up and applying for rented sheltered accommodation? I've heard of quite a few people who have done this recently. If they're on means-tested benefits then they can get Housing Benefit and Council Tax Benefit.

Depending on their age, they possibly could do an equity release of 25%, which would release £31,250.

Sorry to have seemed to hi-jack your thread, BTW, but Frank asked me a direct question which I attempted to answer.

And no, I don't want any family member to feel they have to 'support' me. Not until I get an awful lot more decrepit than I am now, and hopefully that will be a while.

HTH

Margaret

franklee

Hi margaretclare,

Thank you very much for such informative answers, you have obviously researched this really well. Although I must confess to being a researching son

Hi redbabe, I take responsibly for any hi-jack although I think we're still on topic really as it's still equity release only in a different way to what you were considering.

It's hard to answer about the five of you buying the house. If you need to raise a mortgage I doubt any lender would take you on. If you can pay cash then five people can own a house but I think only four can go directly on the land registry so you need to draw up something naming you all. It would also help to set out how costs will be paid, such as to maintain the house etc.

Bear in mind to make anything to do with others properly legal. Unexpected things can and do happen, you or your siblings may get divorced, go bankrupt, get into unmanageable debt, be made redundant etc. etc. If that happens the others may be left with problems outside of their control such as someone not paying their share.

You have not said on what grounds you would give your parents the right to live in the house. You talk about their paying rent so presumably you intend they become tenants? But what kind of tenant? If they are assured shorthold tenants they will not have guaranteed security of tenure should one of the above unexpected things happen. If they are assured tenants you would have problems getting a mortgage. If your parents are tenants then you are looking at capital gains tax on any later sale and income tax on the rent.

Or maybe they won't be tenants? You could give them a life interest in the property but that's a whole different ball game. That would count as your giving them a gift and does come under inheritance tax potentially when you die and certainly when they do (barking as that sounds).

Best to get professional advice but unless you can buy cash I think it would be a non starter with all five of you as owners and your parents having security of tenure. If you can buy cash, at 25K each that may not be too bad, then you need professional advice as there are many ways you could set things up and you need to cope with the unexpected like the ex of a sibling owning a share after a divorce settlement or the death of a sibling.

If you buy on your own will you be skint? What if house prices fall, or you want to buy your own home, or you can't afford the mortgage ...

They may know more on http://www.singingpig.co.uk/forums/ about setting up a company to purchase the property.

I think some of margaretclare's other suggestions above are well worth looking into.