‘I'm cash-poor but don't want to sell my home. Will my inheritance plan work?'
Patricia Lowe finds herself in a position many other pensioners are bound to recognise – asset-rich and cash-poor.
The 79-year-old wants to give £250k to her sons to spend now rather than as part of a future inheritance, but her pensions only pay a combined income of around £40k per year.
One solution might be to downsize – the former adoption social worker first moved into her seven-bedroom home in Shropshire in 1981. With its striking red-brick Victorian architecture, sizeable garden and convenient walking distance from the heart of Shrewsbury, the property is worth around £800k.
There's just one problem, as Ms Lowe explains: 'I don't want to move, that's the bottom line. I love this house. My children were three and five when we arrived so they really can't remember anything else.
'Obviously I could downsize, but that doesn't keep the house in the family. It would be very nice to achieve my objective of giving my children some money and giving myself some money without having to lose my home.'
Ms Lowe's decision to give money to her sons is twofold: She wants to limit the burden of inheritance tax for her children and also wants the choice of giving money to her sons when she thinks they would benefit most, rather than after she dies.
She says: 'I want to make sure they have money at a time of their life when it is of most use. I think usually when you get it [through inheritance], you are past the great point of needing it.'
But Ms Lowe is wary of using equity release – a means by which homeowners aged 55 and over can access the equity in their homes as tax-free cash while retaining ownership of their property – because of the high interest repayments.
She says: 'My mother lived to 97, well that would be 18 years' worth of interest for me. That's a hell of a lot of interest and it would completely outweigh the benefits of having given some money now because they would lose it all at the end.'
One creative solution she is keen to explore is whether her sons could purchase a part of or the entire property via a limited company, after which she could then pay them rent to cover the mortgage repayments.
Doug Brodie, financial planner and chief executive, Chancery Lane
Ms Lowe is sitting on a goldmine owning a home worth £800k that is mortgage-free. Although she is concerned about compound interest, today's equity release products are not what they once were. Lifetime mortgages now include drawdown facilities, voluntary repayments, fixed interest rates and inheritance protection guarantees.
Modern plans offer flexibility and control, allowing people to downsize their equity, not their home. A retirement interest-only (RIO) mortgage could be ideal. Ms Lowe would borrow the lump sum she needs and make interest-only repayments, with no compound build-up.
Assuming a 5-6pc interest rate on a £250,000 loan, monthly repayments would be £1,040- £1,250 – well within her pension income. The capital would only be repaid when she enters care or dies, i.e. when the house is sold.
Ms Lowe's own solution to let her sons buy the home through a limited company is a creative idea but it's overthinking the options. Often people take technical solutions and try to apply them to their personal positions without realising that those solutions are designed either for commercial operators or families with multi-million amounts of dormant assets. The legal and tax complexities will definitely outweigh the benefits here.
With seven bedrooms, Ms Lowe could consider taking in a lodger through the rent-a-room scheme. This would mean a tax-free income up to £7,500 per year, minimal disruption and it could provide a steady gift to her sons.
While not a solution for unlocking a lump sum, it could supplement her pension and boost savings – with seven bedrooms there might also be an option for Airbnb lettings.
The best solution will simply be to stay away from complex products and costly over-engineered solutions. A competent equity release broker can remove anxiety in that area, and simple cash agreements with the sons will solve the rest of the quandaries.
Nick Mendes, mortgage technical manager; John Charcol; and Nick Sutton, sales director, Retirement Solutions
Ms Lowe's concerns around equity release are completely valid, particularly when it comes to the potential for interest to compound over time. If Ms Lowe were to borrow £250,000 against her £800,000 home, the current best rate available as of today is a 6.4pc monthly equivalent rate (MER), or 6.59pc annual equivalent rate (AER).
If she chose not to make any repayments, the balance after 15 years would grow to approximately £651,261. This gives her the cash now without the need for monthly payments but does of course mean a significant reduction in the value of the estate left behind.
There are ways to mitigate that compounding interest. If Ms Lowe feels able to cover the interest payments each month, there are products offering discounted rates while those payments are being maintained. The best currently available sits at 6.23pc MER or 6.41pc AER, which would equate to monthly payments of £1,298 to cover the interest. This would prevent the debt from growing over time, protecting the remaining equity.
Depending on whether Ms Lowe wanted the full £250k immediately, a drawdown facility could make a great deal of sense. She could, for instance, take £150k to give as an initial gift to her sons, and retain a further £100k as a pre-agreed reserve to access later if needed, perhaps for future care costs.
Ms Lowe's idea for her sons to purchase the property via a limited company is innovative but it presents several practical and financial hurdles.
Company mortgages, sometimes referred to as limited company buy-to-let mortgages, attract higher rates and fees than standard residential products. Lenders often require larger deposits, and the fact that one son lives in Germany and both already hold mortgages complicates matters further.
Given the tenant is a family member, the lender will consider this as a regulated deal – which will narrow the options.
There are tax implications too. Selling her own home to her sons would trigger stamp duty, including the 3pc second property surcharge, and potentially capital gains tax further down the line.
Additionally, Ms Lowe would lose her principal private residence relief, meaning any future sale of the property by the company would be liable for corporation tax on any gains.
She'd also be paying rent to her sons' limited company, and that's income the company has to declare and pay tax on. It might feel like a workaround to unlock funds, but realistically it's unlikely to be more cost-effective or administratively straightforward than an equity release or retirement interest-only mortgage.
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