Lifetime mortgages
Lightening the inheritance tax burden

Would you sell your home for half its current value for the right to live in it until death? This radical proposition is what's on offer from home reversion plans, which, as of April 6, have gained respectability by being regulated by the Financial Services Authority.

These plans and so-called lifetime mortgages are the equity release schemes used mainly by older homeowners to fund lifestyles or to boost retirement incomes.

However, in future years they could become used among older homeowners that are looking to lighten the inheritance tax (IHT) burden on their estates.

The idea is that homeowners give the released equity to their heirs to reduce their asset base. As long as the donor survives seven years, the financial gift falls outside the IHT net.

The new Financial Service Authority consumer protections for reversions bring their regulation into line with lifetime mortgages, which should boost confidence among potential buyers.

So how do these two equity release vehicles compare, and how might they stack up as IHT planning tools?

A potentially off putting feature of reversions is they involve selling all or part of your home outright, albeit while retaining the right to continue living there. By contrast, lifetime mortgages typically involve a roll-up loan where the interest is added to the overall debt.

Another potential disadvantage is that home reversions mean the forfeiting of future house price gains. And homeowners are always paid less than the market value - as little as a third of the property's price for younger retired people - because they continue living in it effectively rent-free.

Against this, home reversion plan-holders are insulated from falling house prices. Reversion plans make most sense if you believe property prices will be flat or will fall. By contrast, the more house prices rise, the more attractive a lifetime mortgage will be.

How long the homeowner lives is also key to the vehicles' relative attractions. Because the interest is normally rolled up into a lifetime mortgage, the longer the homeowner lives, the greater the accumulated debt. At worst this can eat up the property's full value - though most mortgages now carry a "no negative equity guarantee" which means that there is never the risk of having to repay more than the value of the home at the time it is sold. This rolling up of interest also has the effect of reducing the value of an estate for IHT purposes.

With a home reversion, a homeowner can sell just a part of their property knowing that any remaining share may - subject to IHT - benefit their heirs.

If you require any further information about the services that we provide or would like to review your financial planning position, please email or contact us.

Levels and bases of, and reliefs from, taxation are subject to change.

Article date: 06.07