Contributed by JOHN WESTWOOD
ANYONE WHO bought residential property in Portugal in the last 20 years or so is likely to have benefited greatly from the dramatic increase in property values. However, these same individuals will have also noticed the substantial increase in the cost of living over the same period.
Sadly, for many whose incomes are fixed, or where they have not kept pace with inflation, the story is of dwindling spending power. Lower interest rates, poor pension performance, the decline in the welfare state and the increased cost of long-term care have all reduced available retirement income for these individuals.
An additional factor is, that nowadays we are generally living longer and staying healthier, thus able to enjoy a more active retirement. As we all know though, travel, entertainment and most hobbies, such as golf, all come at a price.
Perhaps, for some individuals, it is time to use the increased equity built up in their home to redress the balance.
In many cases, individuals, who find themselves in this very difficult situation consider downsizing their property – in other words, they sell their current home, buy a smaller one and use the difference in value to plug the gap in their finances.
But, this is never straightforward and downsizing can be a very expensive and traumatic experience. Before going down this route, one should consider the costs involved very carefully.
Firstly, there may be a substantial Capital Gains Tax (CGT) liability. Unlike in the UK, CGT is payable on your main residence at varying rates, dependent on whether you are Portuguese resident or not. Although rollover relief should be available, there will nevertheless be a proportionate charge on the amount not reinvested in the new property.
In addition, there will be other significant costs involved in downsizing. Firstly, if you use an agent there will be selling agent’s fees of about five per cent plus IVA. On the purchase side, you will have Purchase Tax (IMT) of up to eight per cent, dependent on the purchase price. Added to that, there is Stamp Duty of 0.8 per cent, notary and registration fees plus your legal fees.
Finally, there are removal costs, to say nothing of the upheaval and stress that comes from moving home. All of this means that downsizing comes at a very considerable cost, both financially and emotionally.
Another possible course of action is to take out an interest only mortgage. However, for those whose income is tight, it may not be possible to get such finance and even then there are interest payments to be met each month. Little wonder people have put off either course of action hoping that some miracle will happen.
Maybe not a miracle, but something very exciting is happening in Portugal for the first time that may be of great interest to people in this situation.
It is not without some pride that I am able to announce that Blacktower has been instrumental in launching a range of Equity Release products new to the Algarve. These products are provided by large International and High Street banks and are only available through a limited and select number of advisers.
Equity Release schemes use the value of the equity in your home to provide you with additional cash and income to help you plug that gap in your finances. There are several possible advantages in using an Equity Release scheme as opposed to downsizing.
Firstly, the cost of setting up an Equity Release scheme is generally far less. Secondly you can avoid the stress and time involved in moving house. Generally speaking, an Equity Release scheme will take around eight weeks to complete, so, it is far quicker than trying to sell and buy a new home. Furthermore, the cash released is tax-free.
There are no monthly repayments required under these new schemes and no tax to pay, meaning that any cash you receive is totally yours to spend as you wish.
The way these new schemes work is that you take out an interest-only loan on your property, keeping some of the loan as tax-free cash to boost your savings. The remainder of the loan is invested to cover the interest due and charges. In addition, the aim is for the investment to produce a return sufficient to provide a very worthwhile annual cash sum. This can be spent as you wish and is tax-free.
The loans are not subject to status, income or age restrictions, the only requirement being that your property value is at least 267,000 euros and you have little or no mortgage currently secured on it.
Of course, Equity Release schemes are not suitable for everybody and you should always seek independent professional advice.
