With the formal regulation of sales advice and general regulation of the Home Reversion Market set to be introduced in April 2007, this article discusses what they are and how using one can potentially reduce Inheritance Tax (IHT) liabilities.
Home Reversion Plans in Detail
Because big name providers favour lifetime mortgage products, Home Reversion Plans have been overlooked for a number of years, but comforted by new regulation and a tougher sales and advice regime many experts are expecting the market to grow in the next few years.
Lifetime mortgages, where homeowners release cash by taking out a loan on their home make up the lion's share of the growing £1billion equity release market and Reversion Plans only currently account for only £54million of this total, but from mid next year this trend is predicted to change.
In simple terms Home Reversion Plans (HRPs) are where you sell all or part of your home in return for a lump sum or a series of payments. The person taking out the HRP then effectively becomes a tenant in their own home with the right to reside there until they die or move out. How much you get for selling your home depends on your life expectancy, which will be influenced by a number of factors including your age, gender and health. In short the longer you are expected to live the lower the amount of money you will receive as settlement of a HRP.
An example of a HRP is a couple aged 72 with a £500,000 home could get 40-45% of the value of the proportion they sell. If they sold 50 per cent of the house and received 40% of that sum, this would equate to a lump sum of £100,000 (i.e. 40% of £250,000). The homeowners retain the right to live in the property rent-free until they die, but would be responsible for maintenance and upkeep of the property. On death of the owners the property would be sold by the HRP holder and after deducting costs they would receive the sale proceeds from their proportion of the property.
With more and more households being dragged into the inheritance tax net (IHT), some people believe HRPs could become more of a mainstream IHT planning tool. Homeowners can effectively cut their IHT bills left to their heirs by taking some of the value of their property and then making cash gifts to relatives. As long as they survive the time the gifts are given by seven years the donors avoid paying IHT on this amount under potentially exempt transfer (PET) rules.
In the example above, were the 72-year-old couple to sell a 50% share in their home, they would live rent-free rent free in the property until death. On death their inheritors would get the remaining half share of the property. If the value of the half share remained the same at £250,000 this would fall below the current IHT level of £285,000. However, if the inherited the house without the HRP in place they would have to pay IHT of £86,000 on the full value of the home.
The big risk to anyone looking to take out a HRP is that nobody can predict what will happen to house prices, IHT policy or indeed HRP legislation in the future. There are a lot of variables to consider a future government might get rid of IHT or if property prices continued their march to even headier heights the inheritors might lose out. In another example, if you were to die shortly after taking out a HRP the heirs would be much worse off.
Potential customers should think about the costs of setting up a HRP. At the time of writing set up fees and generally between £1,000 and £1,500 and are then followed by a property valuation and solicitors' fees. This means the total could rise to around £2,500 depending on the circumstances and complexities of the case. All the companies who offer HRPs have different requirements for application, generally starting with a minimum property value and also a minimum age requirement.
One thing to bear in mind is that for low-income families the injection of cash from the HRP provider can affect state benefits. Another thing to consider is that once you commit to a HRP there is no way out of it. It is strongly advised that anyone considering a HRP discusses all the different options with their families. Some people argue that a house is security and security should always take priority over tax planning.
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Adrian Hudson began his career in I.T Management, but after recognising a niche for a company with a finance and I.T mix, he formed his own consultancy business, which specialises in Corporate Finance. He is currently dedicating all his time to sorting out the business fundamentals for the secured loans business We Introduce You.
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