Asset Rich and Cash Poor? Equity Release could be an option – Here’s what you need to know.
The economic outlook for many people is rather daunting. We can now expect to live longer and as such will need to contribute a lot more towards our retirement. Many people in retirement find themselves in the “asset rich and cash poor” situation as they reach mid retirement.
Many people value the property they live in, not only as an asset for the purposes of leaving a legacy but principally as home. Unfortunately, many people are having to resort to downsizing in order to cut the ongoing costs of running their homes, as well as releasing capital to maintain their living standards. However, the disadvantage of this exercise is 2-fold; firstly the availability of a suitable property in the correct location and secondly the underlying costs of moving, and the time frames involved.
Property as an investment is very illiquid, therefore it can be difficult to use the value of your home to boost your finances. Many clients would like to have their cake and eat it and we have seen a considerable rise in the use of Equity Release products which allows people not only to stay in their own home but also release capital to enhance their cash/ income position. Equity Release is a way of releasing cash out of your property by effectively taking out a loan secured on your home without necessarily having to repay the loan.
Equity Release is a very suitable solution for a lot of people and there are numerous situations that Equity Release can help with. Like all things though, with Equity Release, there are positives and negatives so advice needs to be sort in relation to this area of your financial planning:-
• A tax-free lump sum – which can be used for any purpose
• With planning, you can withdraw money as and when you want it. (Drawdown)
• You can live in your home for as long as you want.
• No regular repayments – the loan is repaid when the property is sold.
• Depending on the plan you take out, you may have options to still leave some inheritance for your dependents.
• Reduces the value of your Estate.
• Allows you to gift your children/grandchildren now which allows you to see them enjoy their inheritance.
• The value of the estate you leave behind will be reduced.
• Equity release can affect your entitlements to state benefits.
• Charges may apply if you choose to repay the loan early.
• The debt will grow over time, and interest adds up, although this can be limited by releasing money only as you need it.
• Due to the nature of the compounding interest and the unknown duration of the loan, it is not possible to calculate the final debt amount.
Equity Release is only available for people 55 and over, and paid back when your property is sold. The amount that can be released will be based on your property value, your age and your health status.
There are two types of equity release, a home reversion scheme or a lifetime mortgage.
A Home Reversion Scheme allows you to sell a proportion of your home to an Equity Release company. For example, you can sell 50% and retain 50% of the value of your property for inheritance purposes.
Lifetime Mortgages are a fixed interest rate loan. Unlike conventional repayment mortgages, you don’t pay it off in regular instalments. Instead, your debt is rolled up, which means the interest is calculated on an ever increasing total, and only repay it when the property is sold.
Both of the above options need to be discussed with a qualified Financial Adviser as well as discounting other alternatives.
Equity release schemes are designed to be a lifelong commitment, so, if you change your mind, need to move to a new house or want your equity for something else later, you could find yourself seriously restricted.
If you are asset rich and cash poor and would like a no-obligation chat on what solutions are available to you please contact Katie Lawley at The Law Practice.
A gifted deposit is any amount that somebody (usually bank of mum or dad) gives a home buyer towards their deposit or gifts them the entire deposit.
More and more people are relying on gifted deposits to get a mortgage, but what does this mean for you?
Here at The Law Practice, we ask for proof of funds covering three months to see where the deposit is coming from and to ensure that this amount has been in your account for at least three months. During these three months, if we see that any significant amounts have gone into your account then we ask for a trail to be seen such as bank statements to show that an amount has been transferred from your savings account into your main account.
However, if this amount is a gift from anyone else then please note that Anti-Money Laundering laws require us to do the following:
A signed statement will be obtained from the gift donor: The purpose of this statement is to ensure that this amount is a non-repayable gift and the person has no interest in the property. This is directly sent to the gift donor once you provide us with their contact details.
A Bankruptcy Search will be carried on the gift donor: This will be done on completion and then £2.00 will be added to your bill.
Obtain certified photographic ID and proof of address from the gift donor.
An ID check on the gift donor: This will be £10.00 plus VAT and be completed as soon as the ID is received.
Obtain source of funds: This must show that the gift amount has been in their account for at least 3 months, if not then we must see a trail of where it came from.
At The Law Practice, for gifted deposits, there is a cost of £50.00 plus VAT for doing all the above work.
Different lenders have their own rules and requirements regarding the gifted deposit. We report this gift to the lender and ask them to confirm whether they are happy to proceed with the purchase. Some lenders also require their own statements to be completed by the gift donor. Therefore, if you are getting a gift towards your purchase please let us know as soon as possible so that we may carry out the above steps and allow the lender time to respond back to us in time for your transaction to not be delayed.
If you have any further questions, please do not hesitate to contact our conveyancing department on 0121 778 2371 or send us an email.
A Guide to Help Untangle Inheritance Tax
News updates relating to personal finance are hitting the headlines with more regularity especially topical and political headlines about pension’s freedoms, ISAs, Care fees and Inheritance Tax; most of which are still not widely understood. In the case of inheritance tax that’s worrying, because it affects thousands of families every year and some simple planning could save thousands of pounds for your family instead of going to the Revenue.
Modern inheritance tax dates back to 1894, when the government introduces ‘estate duty’ as a tax on the capital value of land.
Inheritance tax is not just for extremely wealthy people to worry about: rising property prices have meant more estates than ever are likely to face an inheritance tax bill. In fact, the amount of inheritance tax collected over the past five years has doubled, and the number of estates paying inheritance tax has nearly tripled over the same period.
In 2015/16 HM Revenue & Customs (HMRC) collected £4.7 billion from thousands of bereaved families.
If your estate has an inheritance tax liability, your beneficiaries will have to pay the inheritance tax bill; not necessarily the kind of legacy most people think of leaving behind.
The good news is that there are plenty of things you can do to take care of a potential inheritance tax problem. However, finding the right options for you will depend on your personal circumstances. In this guide, we set out some of your options in more detail to help you make an informed choice.
Estate planning can be complicated, although in many cases it doesn’t have to be. Talking to a Solicitor and a Financial Adviser about your situation can make a real difference. At TLP, we assist a great number of clients with the affairs of a deceased parent or spouse; our experience is that too many people are leaving their loved ones with a large and unnecessary tax bill to pay. The Law Practice Ltd have a dedicated probate department who alongside our recommended financial advisors can check your current will and financial situation and advise on the best way to leave your estate to your loved ones and at the same time make sure they benefit from the new inheritance tax based allowance.
The Basics of Inheritance Tax
Inheritance tax is paid on the value of the assets that a person leaves behind when they die. It can also apply to some gifts that are made before someone dies.
When you die, your ‘estate’ is the assets you leave behind
If you are married or have a civil partner, then you can leave your entire estate to your spouse or partner free of inheritance tax. However, if you want to leave some or all of your estate to other family and friends, then it may be liable for inheritance tax.
Who pays inheritance tax?
If the value of your estate is worth more than £325,000 (known as the ‘nil-rate band’), then HMRC will expect your Executors or Administrators to pay inheritance tax, at a rate of 40%, on the value of your estate over that amount.
Your estate can include:
- Your house and any other properties you own.
- Any savings or investments (some types of pensions are excluded, however other investments, including ISAs, are taxable).
- Any other assets.
- The value of any life insurance policies in your name.
The value of your assets is the total of all assets, this includes worldwide assets, so overseas bank accounts and property.
How to work out what your estate is worth
After adding up your assets, your next step should be to subtract any outstanding debts; these could include credit cards, loans and mortgages. You can also deduct the value of some gifts you may have made make during your lifetime, charity donations left in your will and reasonable costs for your funeral.
After calculating the value of your estate, is this potential value less than £325,000?
Should your estate be less than £325,000 then there is no inheritance tax bill right now. However, you should monitor the value of your assets, as any increases between now and when you die could mean your estate may breach the £325,000 Nil Rate Band and a potential inheritance tax bill.
Where the potential value of your estate exceeds £325,000 then your nil-rate band will be fully used up, and the remainder will be subject to inheritance tax.
Marriage and Inheritance Tax
Inheritance Tax rules differ depending on whether you are single, married or in civil partnership.
If you’re single and your estate is worth more than £325,000, anything over that amount will be liable for up to 40% inheritance tax.
If you are married, or in a civil partnership, the assets you leave to your spouse will be transferred without any inheritance tax to pay, and leaving assets to a spouse does not use up your nil-rate band.
If you pass on any of your estate to someone other than your spouse or civil partner, and your estate is valued at more than £325,000, then the excess will be subject to up to 40% inheritance tax (excludes gifts charities and political parties).
The estate of your surviving spouse, now widowed, will be subject to inheritance tax as outlined below.
When someone dies, their unused nil-rate band can be transferred to their spouse or civil partner.
For example, if your spouse left everything to you before they died, you could potentially have a combined nil-rate band of £650,000.
If you are part of an unmarried couple, you are still treated as single for inheritance tax purposes which means that each of you has a separate nil-rate band of £325,000 which cannot be combined upon death.
The current nil-rate band works so as when the first spouse or civil partner passes away they can leave their entire taxable estate to their surviving partner.
On the death of the surviving partner their estate can claim a total nil-rate band of £650,000 – double the individual nil-rate band.
In a similar way, the estate of the surviving spouse or civil partner to pass away will be entitled to claim double the residence nil-rate band applicable, in the year of the second death; providing their partner’s estate did not make such a claim. The maximum amount of claim will therefore be limited to;
- The greater of the allowance at the time of the home owned by the deceased.
- The value of the home owned by the deceased
The new residence nil-rate band
A new inheritance tax allowance was introduced in 2015. But the headlines that claim it will give people a £1 million nil-rate band needs to be understood and scrutinised closely.
Inheritance tax is a problem for homeowners
After years of rising house prices, more people are now facing an inheritance tax liability due to the increase in the value of their home. What’s more, the current nil-rate band of £325,000 for inheritance tax is expected to remain frozen until 2021.
In 2015, after acknowledging the inheritance tax problem faced by large numbers of homeowners, the Government introduced an additional inheritance tax allowance of up to £175,000. This additional allowance applies to the family home in certain circumstances. Even with this additional allowance, forecasts show that HMRC’s inheritance tax receipts are expected to continue to rise.
Introducing the residence nil-rate band
- The residence nil-rate band will apply to the estate of people who die after 6 April 2017.
- You must plan on leaving a residence to your children or grandchildren.
- It starts at £100,000 per person, increasing by £25,000 every April until 2020, when it will reach £175,000 per person (£350,000 per couple). Adding this to the couple’s nil-rate band equals £1 million per couple.
- From April 2021, it will increase in line with inflation every year.
Be aware; who can claim the new allowance?
The intention is that married couples and civil partners will eventually be able to pass on assets worth £1 million, including the family home, without paying any inheritance tax at all.
However, not everyone will benefit: there are a few rules you should be aware of:
- As the name suggests, this new allowance will apply where the person who has died owned a property that was at one time their home.
- It will also only apply if the property is being left to the deceased’s direct descendants (children or grandchildren). Gifts to a trust do not count as a direct descendant.
- It won’t help you if you don’t own a property, or if you don’t have direct descendants; or if you want to leave your home to someone other than a direct descendant.
- Property values less than £175,000 per person, or £350,000 per couple, will only partially benefit.
- Where an estate exceeds £2 million, the residence nil-rate band will be reduced by a rate of £1 for every £2 over the £2m value; this means that larger estates may not benefit from the new allowance.
- Anyone who disposed of their property before 8 July 2015 – for example, because they are in residential care or living with their children – will not benefit from the new allowance at all.
The new residence nil-rate band has been advertised and announced as allowing couples to claim £1 million of inheritance tax exemption. However, to do this, the following criteria have to be met:
- One spouse must pass away after 6 April 2020, when the £1 million maximum is reached.
- The surviving partner must own a home worth more than £350,000 when they die.
- They must leave that home to their children or grandchildren.
- Their total estate must be worth less than £2 million; likewise for their deceased spouse.
You may still be a little confused as to what applies to you and your situation. The first step is to get a financial review from our recommended team of financial advisors to establish IHT strategies to work alongside retirement and care fees planning. Things to consider are pensions as part of IHT and succession planning, and employ Equity Release as a supplement or additional income stream.
From here The Law Practice UK Ltd can review your Will. Remember, leaving your estate in trust does not count as a direct descendant so for those who have established a Discretionary Will Trust as part of their estate planning will need a solicitor to review what is currently in place.
Please call Katie Lawley at The Law Practice today for a confidential and no obligation discussion.
The Importance of a Will, and How a Solicitor Can Help You
For the avoidance of doubt. One day you will die! This is not breaking news but for something that is a certainty two thirds of the UK Population do not prepare for this by failing to make a will. Intestacy queries with the citizens advice bureau have doubled over the last 5 years.
At a stressful time for your loved ones leaving a will gives your friends/family an informed choice of how your assets should be distributed. Also, who will oversee organising your estate and following the instructions you leave in your will.
Using a solicitor can save a lot of stress for those you leave behind, as well as giving you a bit more peace of mind.
Your will tells people two very important things:
- Who should have your money, property and possessions when you die.
- Who will oversee organising your estate and following the instructions you leave in your will.
Seriously consider using a solicitor to write your will if:
- You have overseas assets.
- You run a business and you expect it to form a part of your estate.
- You will have to pay Inheritance Tax – this is paid on estates valued at over £325,000 for an individual or up to £650,000 for a married couple.
- Your family position is complicated – perhaps you have children with a previous partner, or you want to make special arrangements for children or a family member with a disability.
The benefits of using a solicitor:
- You are protected if something goes wrong. Solicitors are regulated.
- You can be more confident there are no mistakes.
- The complicated areas are done for you. Solicitors will be familiar with the law and will be able to help you make the most effective choices.
- Your will is stored safely.
What to expect from your solicitor:
Your solicitor should:
- Explain your options to help you make decisions about your will
- Give advice that is confidential and puts your best interests first
- Write and check your will according to your instructions
Make sure they also give a clear indication of costs and how they will be calculated at an early stage.
Solicitors as executors:
You can choose to appoint the solicitor or law firm who draws up your will as your executor. This means they will handle the arrangements for your estate when you die. Most importantly having a solicitor as executor means there is no emotional connection and their job is to carry out your wishes to the fullest extent.
The Law Practice UK Ltd have a specific Wills and Probate department based in both our Midlands and Hertfordshire offices. Please do not hesitate to call Katie Lawley to discuss your requirements.
Shortlisted for Conveyancing Firm of the Year – Midlands
The Law Practice Ltd UK is very excited to announce being shortlisted for the Eclipse Proclaim Modern Law Conveyancing Awards.
Modern Law Magazine was launched in 2012 following the liberalisation of legal services, with a specific focus on the business of law. Following the successful launch of the Eclipse Proclaim Modern Law Awards – now well established as one of the most exclusive events in the legal calendar – the Eclipse Proclaim Modern Law Conveyancing Awards were created in 2016 to celebrate talent, success and innovation in the conveyancing, and this year the event promises to be even bigger and better.
Embracing the business of law has never applied more to those operating in the conveyancing market, who have emerged from the darkness of the recession with a new sense of determination. Firms continue to experience an upturn in work and many now are focusing on cementing watertight business strategies that are capable of withstanding any future challenges. The challenge now though, is to do this whilst maintaining a high level of commitment to client care.
The winners will be chosen by an esteemed and experienced Judging Panel, which will be chaired by Bold Legal Group founder Rob Hailstone. The awards will recognise those taking the lead in innovating to find unique solutions for their businesses and clients, those who have achieved successes as teams or individuals, and those championing client care.
Conveyancing Firm of the Year – North of England
Conveyancing Firm of the Year – Midlands
Conveyancing Firm of the Year –South of England
Conveyancing Firm of the Year – Wales
Search Provider of the Year
Innovation of the Year
Rising Star of the Year
Business Development Professional of the Year
Service Provider of the Year
Client Care Award
Best Use of Technology
Outstanding Commitment to Training
Property Team of the Year
Conveyancer of the Year
The Law Practice UK Ltd would like to take this opportunity to thank our clients, new and existing and loyal referrers. Your great reviews and continued support means we have been noticed as a firm for our commitment to customer service.
You’ve done all the leg work, you’ve found the perfect home to settle down in, it’s essential now that you get the first week right, we are going to summarise the essential checklist when it comes to moving into your new home.
Moving house is a big transition in life and with it comes a certain level of uncertainty. Cardboard boxes, bubble wrap, and lots of newspaper is what you will be accustomed to when moving house. Ask anyone who has moved before and you will always misplace (lose) something, It’s a chaotic time and there will be times when you feel helpless, however, we are going to run down everything that will ensure you have a smooth moving in day.
Six weeks before you move in is a good time to begin transitioning all your bills, insurance and post to your new address, it is also the chance to notify your landlord if you are in rented accommodation your estimated move date. Start getting removal quotes too.
Four weeks before, start going through things and having a sort out. There are bound to be things you have been meaning to get rid of for years. Go through wardrobes/loft etc and start a charity bag. Start packing the non-essentials such as books and pictures.
Three weeks before talking to your solicitor about completion dates that work for you.
Two weeks before the big day start the process of packing the rest of your items for moving day. Now would be the perfect time to notify the bank of any changes to your direct debits and standing orders.
Now is also about the time to confirm completion dates with your solicitor and ask them to check with all other solicitors in the chain so everyone is working to the same date.
The stress factor will be ramping up now as you approach the big day.
Mark boxes clearly and puts them in the relevant rooms the other end.
Food is often overlooked so take some basic food items such as breakfast cereals, bread, spreads and tableware separately with you to your new home if that is feasible.
When moving it’s essential to not get overwhelmed, moving is an ongoing process. If a few days into packing/unpacking you need to take some time out to just take stock of the situation then do that.
Like anything, it’s important to have a plan, so we’ve made the essential Moving Home Checklist with a handy tick box feature so you can keep track of what you have done.
Let’s begin by explaining the difference between the two Conveyancing search options out there, a full official search and a personal search. The Local Authority Search is carried out by the Local Authority, whereby a Personal Search is carried out by a search provider, who visits the council office and records the information. (more…)