Home reversion plans, which used to be a popular way for homeowners to release cash from their property, could be set for a comeback as formal regulation of these schemes next April is likely to give them some much-needed respectability.
Home reversion plans have been overlooked for years because big name providers tended to favour lifetime mortgage products. But companies which are already marketing these plans predict that big high street names could enter the
market next year, comforted by a tougher sales and advice regime.
Home reversion schemes might not just be suitable for income-hungry homeowners but could also become a clever way for individuals to reduce growing inheritance tax bills, some financial advisers argue.
Lifetime mortgages, where homeowners release cash from their property by taking out a loan on their home in later life, make up the lion’s share of the growing £1.16bn equity release market. Reversion plans account for just £54m of this total.
But this could begin to shift next April. Under reversion schemes, homeowners sell all or part of their home in return for a lump sum or a series of payments. They then effectively become 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 likely to live, the lower the percentage of the property’s current value you will secure under a reversion scheme.
With a reversion plan from Norwich Union, the most well-known provider in this market, a couple aged 72 with a £500,000 home could get 40-45 per cent of the value of the proportion they sell, the company says. If they sold 50 per cent of the house and received 40 per cent of that sum, this would equate to a lump sum of £100,000.
The homeowners would then retain all rights to live in the property, rent-free, until they died but they would be responsible for maintenance and upkeep of the property. On the death of the owners, the property is sold by the reversion provider and, after deducting selling costs, the reversion provider receives all the sale proceeds from their proportion of the property.
Graeme Marshall, chief executive of Sovereign Reversions, the equity release specialists, is adamant that the reversion market is going to grow.
“If independent financial advisers looked at lifetime mortgages and equity release products side by side I’d say 1 in 5 homeowners are more suited to home reversion,” he says.
“People are just waiting for the regulation to come through and then they’ll jump on the bandwagon. I believe the market will move from £50m to £200m within a couple of years.”
With more and more households being dragged into the inheritance tax (IHT) net, some advisers believe home reversions could become more of a mainstream IHT planning tool. Homeowners can effectively cut the IHT bills left to their heirs by taking some of the value out of their properties and then making gifts of some or all of this cash to relatives. As long as they survive the gift by seven years, the donors will avoid paying IHT on this amount under potentially exempt transfer (PET) rules.
In the Norwich Union example, were a 72-year-old couple to sell a 50 per cent share in a £500,000 home, they would then live rent- free until death in the property. On death, their inheritors would get the remaining half-share in the property which, assuming its value remained unchanged, would equate to £250,000. As this falls below the current IHT threshold of £285,000, they would not have to pay anything to the chancellor. However, if they had inherited the full value of the house they would have paid £86,000 in IHT.
The risks for the homeowner are that nobody can predict what might happen to house prices or IHT policies in the future. Indeed, a report by the Tories’ Tax Reform Commission, released this week, proposed the abolition of IHT. Similarly, if property prices rose, your inheritors would lose out. Equally, if you died shortly after selling a portion of your home, your heirs would be worse off.
Valerie Smart, director of tax at PricewaterhouseCoopers, has seen equity release schemes used by those whose assets are all tied up in property. Some sell their house and give the cash away to family.
She cautions that this is a dangerous and expensive approach to IHT planning because the investment company will profit from any future growth in the value of the property.
Potential customers should also think about the fees which reversion plans incur. Set-up fees are generally between £1,000 to £1,500, and are followed by a property valuation fee and solicitors’ fees. The total can be around £2,500 depending on the circumstances.
All reversion providers have different requirements for application, generally stating a minimum value of the house and a minimum age requirement.
Smart believes it is understandable that people may want to concentrate on IHT planning but urges caution. “It’s a once-and-for-all decision – once you’ve agreed to it, you’re committed,” she says.
She also points out that increasing income through equity release can have adverse effects on state benefits received, particularly for low income households. She recommends people have a thorough discussion with their family before taking on the plan. “Your house is your security,” she says. “And I think it’s very important that security takes priority over tax planning.”