taxpayer could pass the entire property to his or her family CGT free. A year later the inheritor might sell the property for £260,000 and for tax purposes would have only made a gain of £10,000 and the tax bill would be reduced from £31,000 to only £480. However, you would still have to note that inheritance tax (IHT) would still have to be paid if the total value of the estate went over the current threshold of £285,0000.
One of the attractions of using the lifetime mortgage method to release equity is that the owner would still keep rental income for the lifetime of the loan and interest on the loan can be offset against tax, even though the interest is rolled up and only payable at the end of the loan term.
Lifetime mortgages are already very popular with pensioners who want to unlock equity but still live in their home rent-free. The problem is that the total amount of interest payable could wipe out any profits made on the taking part in the scheme. Another word of caution is that the interest on lifetime loans is higher than mainstream mortgages and may come out at between 1.25 and 2.0 points higher.
However some providers like Life Mortgages offer 'no negative equity' guarantees which guard against the rolled up debt every being greater than the value of the property it is secured against. This stops the potential of actually passing on debt rather than equity to heirs and leaves a worse case scenario of leaving no assets rather than having to pay off an outstanding loan to the mortgage provider.
Many experts suggest that Lifetime mortgages are only really beneficial to people who have no other means of supporting themselves in retirement.
Your age determines how much you can borrow and starts from around 15% of the property value at age 60% up to 48% for those aged over 90. At the time of writing the minimum amount providers will lend is £26,000 with a ceiling of around £500,000. It is also worth bearing in mind there are early redemption penalties if the loan is repaid early and the loan must be repaid in full within a year if you are forced to move into long term care.
Lifetime mortgages can only be obtained from providers who are authorised to sell them by the Financial Services Authority (FSA).
Final PointsThe positives of using these types of loans are that people can release equity tied up in a second home or buy-to-let portfolio without having to sell, capital gains tax is deferred and there are no monthly repayments, as the loan is only settled at the end of the term. Negatives are that it is a costly way to borrow and, as there are no repayments made against the loan, you are charged interest on the interest accrued, so the schemes have the potential of eating into or wiping out your family's inheritance.
Article Source: http://www.upublish.info
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About the Author:
Adrian Hudson
Adrian began his career in MIS Management. To utilise his flair for all things finance, he formed a consultancy business in 1997. Adrian is currently working for the secured loans specialist We Introduce You.
