Elderly who want to unlock value of their homes forced to turn to expensive financial products rather than their family
Legislation comes in to force on April 6
From April 6, pensioners who want to benefit from the rise in house prices and unlock the equity in their homes will be forced to use expensive commercial schemes arranged through banks and insurers rather than sell a share of their property to family members, says Trowers & Hamlins, the City law firm.
According to Trowers & Hamlins, the Government's attempts to stop inheritance tax avoidance amongst the wealthy will also penalise families that wish to help fund a comfortable retirement for their parents by buying a share in their home.
Explains Robert Brodrick, a senior solicitor in the Private Client Department of Trowers & Hamlins: "The new Pre-owned Asset Rules mean that elderly home-owners who want to use some of the equity in their homes to support them in their old age will risk an income tax charge if they want to continue living in the property and not see it pass to the scheme provider upon their death."
The government was criticised when it first announced these plans and there was an outcry in some quarters about their effect on pensioners. However, the guidance and Regulations released last week by the Inland Revenue showed that it has refused to back down.
Brodrick says: "The Revenue's guidance and Regulations explain that in the future where a person sells a part share of their house to another person to whom they are connected (e.g. a relative), they will be subject to an income tax charge on the perceived benefit of living in the share of the property that has been sold if the rental value of this share exceeds 5,000, unless the transaction falls into one of the exemptions. Anyone who did this before 7 March 2005 will not be caught."
He adds: "It is the less well off pensioners, unable to pay the income tax charge, who will suffer the most from this legislation. The only way they will be able to unlock some of the value from their homes is by going through a commercial equity release scheme."
"A commercial equity release scheme is going to involve profits and commissions for the companies involved, making it very expensive. Not only this, but on death, the house will pass to the scheme provider and not to the person's family, unless the family can afford to buy the house back from the scheme provider. In a ministerial statement on 7 March 2005, Dawn Primarolo argued that "there are other and more straightforward ways of structuring this than adopting the form of an equity release transaction", and added that she "did not feel it was appropriate to provide exemption" for such transactions between family members."
Given the huge increase in house prices of recent years, many pensioners who never dreamed they would be subject to inheritance tax are now finding that they are.
Brodrick comments: "Many of these pensioners are not cash rich and may have owned their houses for years having bought them when prices were much lower. It seems perfectly reasonable that they should try to use the value in their homes to help them enjoy their retirement, without having to pay high fees to banks and insurers. This is not about inheritance tax, it is about people being able to enjoy their hard-earned money. Sadly, these new rules make it hard for their family members to help them do this."
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Press enquiries:
Robert Brodrick
Trowers & Hamlins
Tel: 020 7423 8027
Matthew Battersby or Nick Mattison
Mattison Public Relations
Tel: 020 7645 3636
© Press Release 2005
