What you need to know to prepare for the new capital gains tax for overseas investors
Beth Mitchell Residential Valuation
Equity release is booming. Even a quick scan through the Sunday papers will alert readers to the competitive financial solutions to unlocking the wealth of debt-free equity in UK housing. The products are aimed at those approaching retirement or already retired; the asset rich and cash poor generation who have the opportunity now to capitalise on decades of house price inflation. For many, however, equity release is a ‘cash lifeboat’ for a variety of reasons.
The ONS’ latest ‘Wealth and Assets Survey’ (to December 2017; released August 2018) found while more than half of those surveyed expect to retire between the age of 65–69, 49% of individuals were ‘not very’ or ‘not at all’ confident that their income in retirement would give them the standard of living they would hope for. With the growth in house prices in the UK over the years having been so significant, increasingly consumers are looking to equity release to either supplement their income in later life or, in increasing numbers, provide a solution to paying unsettled mortgage finance once they become ineligible for traditional methods. For three quarters of those in the age group 55–64, the reasoning for pursuing equity release included repaying outstanding interest only mortgage finance, and for nearly two thirds (60%) settling ‘unsecured debt’ (ERC Q1 2019).
The Equity Release Council (ERC) reported the industry’s busiest start to the year in Q1 2019 with the total amount of equity released 8% up on 2018 figures. A total of £3.94bn was lent during the whole of 2018, up 29% on the previous year. ‘Lifetime mortgages’ account for the bulk of the market; offering a similar option to conventional mortgage finance — customers borrow against their home whilst retaining full ownership of it with the finance settled by their estate when they die or move into long-term care. Different products offer options such as whether to receive a lump sum on day one or draw down in increments over the period. Similarly there are options including paying interest along the way or rolling it up to be settled as part of the final payment.
Home reversion plans offer an alternative whereby customers part with the right to all or part of the ownership of their property in return for the right to remain resident in it for rest of their lives rent-free. Where they retain partial equity, the property is held in Trust by the plan provider who has an obligation to share the proceeds between the investor and customer’s estate on sale. The amount paid to the customer for the equity is discounted to account for the term the investor will have to wait until they are able to relinquish their investment and profit from the property, having received no rent in the meantime. Whilst the period until this point is notoriously unpredictable, investors look to predictions of life expectancy and consider their in-house expectations of house price growth to calculate their pricing. Customers become ‘lifetime tenants’ of the property, free to enjoy their home for the rest of their lives with little intervention from the plan provider. During their life tenancy they are required to keep the property in good repair — to the standard at the time the plan was taken out — and keep it
adequately insured. Most agreements allow customers to ‘port’ their plan if at some point their needs change and they would like to jointly or indeed solely ask their plan provider to help them move to more suitable accommodation. Equally customers who hold onto a share of equity in their home can later sell further increments in order to release additional capital.
Equity release has received bad press in the past, particularly given its vulnerable customer base. As a consequence lifetime mortgages became subject to statutory regulation in 2004, followed by Reversion Plans in 2007. The result has been that we have seen very few new entrants into the market both as investors and managers of equity release property. The Equity Release Council, now established for over 25 years represents consumers’ and providers’ interests, promoting high standards, distributing information, providing advice and connecting interested parties. Restrictions now extend to protect consumers and their estates from negative equity, ensure they have access to an appropriate Financial Ombudsman and to ensure they take up independent advice as a matter of course. During the last 20 years, Allsop’s residential division has acted as valuers to most of the main investors in this specialist sector.
Equity release is quickly becoming a real opportunity for those entering retirement, with ERC statistics showing that their members’ customers average between 68 and 70 years old at take up. The growth in the sector outstrips growth of those exercising their rights to access flexible pension payments under their ‘pension freedoms’. With growth in product range expanding, we are seeing a different type of investor now in the market. Previously the domain of property companies, the home reversion plan market now includes private equity and institutions.
In the (now more than) ten years I have been at Allsop, life expectancy has increased by 5% and house prices nationally by a remarkable 42% (according to Nationwide). In the context of news of a crisis in the elderly care sector and concern from nearly half of those surveyed by the ONS that their existing pension arrangements will be insufficient, the trend in
releasing capital in later years, with security of tenure is set to continue. For investors, equity release offers access to house price growth in the long-term with — unusual for the mainstream residential investment sector — no arrears, bad debts, and altogether relatively ‘hands-off’ management.