Equity release

[dakky]

After having to move from my latest property after 18months with no notice, I was looking at places to rent.

£800 for a studio felt like loads going down the drain and I mentioned as much to the rents.

They have somehow got the bit between their teeth and have spoken to their accountant about this equity release. I personally wouldn't be able to get much of a mortgage.

Their idea is to get £300k (ish) against their house and invest in a property for me. I would make a monthly payment, hopefully directly against the interest, and any interest in theory that is accruing above my "rent" payments are subject to compound interest.

When they both die then the value of the debt is taken from their house being sold (likely worth £1m or so atm).

Is this a good idea? What are the pitfalls? Would it avoid inheritance tax?

They wouldn't feel any effects in theory as you don't have to pay any of the interest and they can't chase the debt until they both die. But I do have 2 siblings (who both own homes and families) so it should be fair on them (if the interest makes the debt large then it could possibly be more than 1/3rd the estate, I guess. I don't know what cash they have in the bank (and don't want to. Told them to spend it all!)

Would there be an advantage in borrowing less and getting a mortgage for say £100k which is I think possible?

I've asked to talk to their accountant who apparently thinks it is a good idea, as do my siblings, in theory... Something isn't sitting right with me, however.

[BorntoBubble]

Im pretty sure they cannot just give you £300k and buy a house in your name although i could be wrong. There are certain ways like in trust i believe they can but if they pass in a certain amount of time you will still pay IHT (Inheritance Tax) To me the best way of doing this is surely to "borrow" as much as you need for a deposit then get your own mortgage.

Or if you cannot get a mortgage then them to buy the house and you to pay a "rent" of the interest on the money seems fair.

Then if when it comes to them passing, they have say £900k and you have two brothers you would only get £700k tax free so would have to pay IHT on the £200k left over. If it was easy numbers it would be ideal if you and your brother all got £300k (in your case if the house you live in is worth £300k then you would get that and not cash) each when they pass and you each pay your share of the IHT (you can insure against IHT if needed). The worst case would be if you all split your house when they passed and if your brothers/sisters have wives etc then it gets really messy!

IHT tax free money is moving to £500k each parent over the next few years so if your parents net worth is circa a million you wont pay tax on this after 2020~ i think.

If entering into an agreement where they buy you a house i would make sure their will is rock solid and all benificators from the will are happy with the situation. It is not a nice thing to deal with after parents pass if your parents wishes are not known before they pass. Its hard to talk about but makes things a lot easier in the long term.

[Woodsey]

Im pretty sure they cannot just give you £300k and buy a house in your name although i could be wrong. There are certain ways like in trust i believe they can but if they pass in a certain amount of time you will still pay IHT (Inheritance Tax) To me the best way of doing this is surely to "borrow" as much as you need for a deposit then get your own mortgage.

Or if you cannot get a mortgage then them to buy the house and you to pay a "rent" of the interest on the money seems fair.

Then if when it comes to them passing, they have say £900k and you have two brothers you would only get £700k tax free so would have to pay IHT on the £200k left over. If it was easy numbers it would be ideal if you and your brother all got £300k (in your case if the house you live in is worth £300k then you would get that and not cash) each when they pass and you each pay your share of the IHT (you can insure against IHT if needed). The worst case would be if you all split your house when they passed and if your brothers/sisters have wives etc then it gets really messy!

IHT tax free money is moving to £500k each parent over the next few years so if your parents net worth is circa a million you wont pay tax on this after 2020~ i think.

If entering into an agreement where they buy you a house i would make sure their will is rock solid and all benificators from the will are happy with the situation. It is not a nice thing to deal with after parents pass if your parents wishes are not known before they pass. Its hard to talk about but makes things a lot easier in the long term.

If they show they have the income to make payments I doubt they will care too much if its to help out a son. If they can't then it's a different issue.....

[doubleup]

I'm not quite sure what is being proposed.  Equity release for retired people usually means a loan taken against the value of a house where the interest is not paid and compounds until the last death.  This means that the loan repaid on the last death of a couple is very large.  You seem to describe some sort of re-mortgage, where you would pay the interest.  I haven't worked in finance for a while, so there might now be available flexible arrangements that allow interest payments to be made.

Re inheritance tax, once again I'm a bit rusty, but the main issue is that if you pay regular interest, the money given to you might be viewed as a "gift with reservation" and considered to be still in the estate.  If it is a genuine gift, it would be considered outside the estate after seven years - if less than seven years I think it would be deducted from the nil rate band (so no saving from the arrangement).

On the wider equity release issue the main problems are not being able to downsize due to the debt being to large, so that there isn't enough money left to buy somewhere decent after its deduction and what happens if one or both your parents needs to go into care.

[EvilPie]

Seems like a fantastic idea to me. Bring your inheritance forward 'x' amount of years to save you thousands over time.

You'll be pleased to know that BorntoBubble is definitely wrong. Of course your parents can give you money, it's theirs to do with exactly as they please. They can withdraw it in cash and set fire to it if they want to. It's subject to UK tax laws but as long as it's all recorded for IHT purposes should the unfortunate happen then you won't have any issues at all.

If your siblings are for it and it's covered fully within the will I can't see an issue with that side of things.

If they 'gift' you the money then after seven years it's free of IHT. This will probably mean that with the future changes to IHT bands that none of your siblings eventual inheritance is subject to IHT thus saving them some tax.

If they 'lend' you the money and you pay interest then they'll have to pay income tax on the interest so bear that in mind. Also as it's a loan then it's always an asset of theirs so will be subject to IHT.

The biggest issue I can see is them being able to borrow £300k. How old are they? Do they both have incomes? If they're 60+ and retired they're going to struggle. If they're in their 50s with a combined income in excess of about £50k it should be fine.

Have you considered taking 100% of your inheritance now? If the pot is £1M you take £333k and have yourself written out of the will completely. Your 'rents pay the mortgage so that is effectively coming out of your siblings inheritance. Long term for tax purposes it should work out fantastically for all of you although you miss out on any gains your parents make between now and them passing. Obviously issues to consider with paying for care in the future if that comes out of the estate as you wouldn't have to finance it.

Definitely loads to discuss with your family but it has lots of potential for everyone as long as you consider all of the potential future issues and make sure everybody knows what they're getting in to. The last thing you want is future family squabbles over money especially as you clearly now are all very agreeable.

[StuartHopkin]

The biggest issue I can see is them being able to borrow £300k. How old are they? Do they both have incomes? If they're 60+ and retired they're going to struggle. If they're in their 50s with a combined income in excess of about £50k it should be fine.

Equity release criteria is very different to normal mortgage criteria, got to be 55+ and no income required as long as the house value is sufficient.

[EvilPie]

Hopefully they're actually looking at releasing equity via re-mortgaging as it'll be a lot cheaper and give many more options.

Actually equity release is quite specialised and as far as I'm aware means they sell a chunk of their house usually to an insurance company of some kind.

If they hit the criteria for a re-mortgage and can be at an LTV of less than 60% they'll be paying as little as £3k per year interest on £300k

[doubleup]

Actually equity release is quite specialised and as far as I'm aware means they sell a chunk of their house usually to an insurance company of some kind.

Not nowadays, I've explained what it is in my post. 

Also as I said it isn't clear what OP's parents are looking at.

[StuartHopkin]

Is it some kind of Lifetime mortgage product Dakky?

There are few of these that now allow payments against the interest

[EvilPie]

Actually equity release is quite specialised and as far as I'm aware means they sell a chunk of their house usually to an insurance company of some kind.

Not nowadays, I've explained what it is in my post. 

Also as I said it isn't clear what OP's parents are looking at.

Pretty sure that a loan taken against the value of a house is just a different way of saying 'sell a chunk of your house'.

There will be a charge against the property meaning the financer effectively owns that bit of the house. The interest on the loan will be huge (compared to a mortgage) and if they live long enough the finance Company will eventually be owed so much that there's no equity left and the siblings get cock all.

If it really is an equity loan then they need to be really careful as it's likely the siblings inheritance will be impacted upon.

[doubleup]

ok gl

[roshambo]

They need to be 55+ to be able to do this, you need to able to show a suitable income to do what they are talking about but they can use your income for it, looking at interest rate around 4.7%.

You are correct in that next on kin cant be asked to pay the balance until either 2nd death or after the 2nd person has been moved into long term care.

To be able to raise £300k on a £1m property you would need your parents to both be over 65 as its done on a % of the value of their property.

[dakky]

Thanks for all your words.

Yes for sure it is a equity release they are looking at. I have been told today it will be 4% approx interest. It's a loan which is paid back with (what can be significant) interest start they both die. It would actually be going into a trust and not my name because I'm a degen at heart and they want to mitigate any risk (and I don't blame them)

Evilpie I wouldn't want them to remortgage their house. The sort of thing is called a lifetime mortgage. One thing that has come up is the issue about what it the house needs to be sold to fund their care.

They are 69 and 75. My mum still works and earns ok (not amazing) money and likely will continue until she is much older.

My dad lost a lot of his pension to the equitable life meltdown.  If it's relevant.

My siblings and I are close, and wouldn't want to leave anything in a situation to endanger that for sure.

I think it will likely happen to some degree. Obviously they have and are taking specialist advice but I thought perhaps people may had some input to any pitfalls (and any advice of "don't do it!! Do do it!!)

Thanks

[dakky]

Well I didn't think I did (want to look at remortgage) but that interest level is compelling... Could you expand a bit more please?

[PokerBroker]

There are some good equity release lenders and there are some poor. 

I don't touch it myself, the rewards for an advisor are pretty lucrative but there is so much work required and hand holding the potential applicants I have decided the risk reward factor isn't in my favour. 

If this is something they are considering seriously speak to a few different advisors and take some tme to see what they offer and look carefully at the providers. 

Assuming they have savings can they "gift" you a deposit and you then look at getting a mortggae in your own name.  It might mean you don't initially get the property you want but it is far more satisfying having your own place than paying someone elses mortgage.