Estate Planning Guide

29 28 ESTATE PLANNING OPTIONS ESTATE PLANNING OPTIONS Principal Private Residence 2.2 This section looks at the arrangements that allow gifting or spending of some of the capital in a client’s home, whilst remaining in the property for the remainder of their lives and by releasing capital tied up in the home. It is usually recommended that this is the last asset to be considered in IHT mitigation and down- sizing is a preferred option. The provisions of the recently introduced RNRB not only provide significant IHT mitigation against a residence lived in by an individual, but also retain the value of the property from which a person down-sizes (see Section 1.2 of this Guide). Reinvesting funds raised against a home in IHT exempt arrangements, no longer has IHT planning advantages; In 2013 new measures led to loans financing the purchase of exempt property or property that benefits from IHT relief (in full or in part) being deducted from the value of the assets qualifying for relief, so that no tax is saved. Privately-arranged equity release (for example one financed with money raised by other family members) is likely to be caught either by Pre-Owned Asset Tax (POAT) or as a Gift With Reservation of Benefit (GROB). However, the Capital Taxes Office (now Inheritance Tax Office) has confirmed that it is not HMRC’s intention to use POAT legislation to catch commercial, arm’s length, equity release transactions. The Equity Release Council, offer important safeguards that make them the most appropriate loans for clients. They provide security of tenure (no home sale unless the client dies or goes into permanent residential care), flexibility whereby a client is able to move homes without penalty, no negative equity will be left for client or beneficiaries and independent legal advice must be taken by the client prior to entering the equity release agreement. This arrangement allows the individual to unlock capital and they are therefore able to make an immediate gift. Assuming they are successful PETs (the donor survives seven years from the date of the gift), the beneficiaries could be much better off than if they had received the property value after the deduction of IHT. In addition, any outstanding debt rolls up within the taxable estate and interest is generally IHT deductible. POAT was targeted at people who had previously given away assets and continued to benefit from them while avoiding the IHT GROB provisions. If an individual disposes of an asset (land or chattels) and then is in possession of or has use of the asset, POAT can apply. The applicable tax for the occupied property is the open-market rent and the charge on chattels is the market value multiplied by the official rate of interest. Applying POAT Home Reversion Plans Clients who enter Home Reversion Plans sell a proportion (usually a large one) of their home to the lender. They will always retain a proportion of the value of the property and become a tenant, with the right to live in the property for life or until entry into permanent long term residential care. However, the payment received by individuals is substantially lower than the value of the proportionate share in the property – perhaps half it’s open market value. Moreover, a proportionate share of any increased value of the property will belong to the lender rather than the client. These issues mean that it is only appropriate to recommend a home reversion plan where the client appears to have a reasonable life expectancy after entering into it. Lifetime Mortgage Equity Release Plans In these arrangements, the homeowner takes out a mortgage secured on their property by a first charge, but the property remains fully owned by the homeowner. Consequently, the property must provide adequate financial security for the lender and as a result, lenders may impose some conditions, although most properties are acceptable. The mortgage company pays out a lump sum generally, at an interest rate that is fixed or capped for the lifetime of the loan. It can either be paid as it arises or allowed to roll up. Repayment of the interest and capital takes place when the property is sold, or when the homeowner dies, or goes into permanent long term residential care. Rolling up the debt can present risks because interest is paid not only on capital, but also on interest accrued to date and this can grow the debt quickly. If property values increase slowly or reduce, the outstanding loan could ultimately equate to the full value of the property. It is also possible to arrange for a regular income rather than a lump sum payment which may assist with lowering interest payments which are on smaller amounts of capital. Nevertheless, from an IHT mitigation perspective, as HMRC is likely to deem that any income received should be treated as capital in the hands of the client, a capital release may be more appropriate. Early preparation is key to successful estate planning. Taking advantage of various solutions to secure wealth often ensures more can be passed on to the next generation. KAREN STACEY, HEAD OF DISTRIBUTION SERVICES, CANADA LIFE