Q My daughter is considering paying off our equity release debt, which stands at £42,000, and giving us £10,000 in cash. In return, we will then give her our property. When we die the house will be hers. If we stick with the equity release and live to be 90, there will be very little left for our daughter to inherit even though the house is currently valued at £130,000. Are there any pitfalls to consider?
I do not plan to go into care if I can help it and would prefer to be cared for at home. We are not doing this to avoid paying care home fees but for her, for later life. If we continue with the equity release, there would not be anything left anyway to pay care home fees should that situation arise.
A You don’t say how long you’ve had your lifetime mortgage (which I assume is the kind of equity release you went for) but if it’s fewer than, say, five years you could be in for a nasty shock in the form of early repayment charges.
“Borrowers who have had a plan in place for a number of years,” says Mark Gregory of equityreleasesupermarket.com, may face early repayment charges “which could be as much as 25% of the amount initially borrowed”.
If your equity release plan is with more2life, Pure Retirement, Legal & General or Just Retirement, before committing to paying it off, it makes sense to find out how much it will cost you to do so. If your plan is with LV, however, the early repayment charge may not be too bad as this lender, according to Gregory, charges a fixed penalty of 5% of the capital borrowed if it is repaid in the first five years, 3% in the next five years and then 0% after that.
If you took out your lifetime mortgage relatively recently, the chances are that your plan is more flexible as many allow for regular voluntary repayments of either capital (up to 10% a year of the original amount borrowed) or repayments of accrued interest.
A possible early repayment charge is one pitfall; another is handing over ownership of your home to your daughter and so giving up control of it. I’m sure it would never cross her mind to sell it from under you but that doesn’t stop it being an option.
As you are already aware, giving away your home won’t help you to avoid care fees but, conversely, sticking with your equity release plan could. In the care fee means test, it is the value of your home less any borrowings on it that is taken into account except that the value of your home is ignored altogether if your spouse will continue living there or if you receive care and support in your own home rather than in a care home.
The other thing that giving away your home won’t mean that you automatically avoid inheritance tax if you carry on living it it after making the gift – you will need to pay rent at the local market rates and bills, and live for at least another seven years. There are likely to be even more pitfalls if your daughter has siblings.