By: John Westwood
Could this work for you?
Most people when they discuss using the wealth that is tied up in their property think of equity release schemes.
For the vast majority who consider this type of wealth planning they would probably choose a form of equity release arrangement. However, there does remain an alternative to this – home reversion.
The scheme my company have introduced to the Algarve market place is based on the concept of granting a life tenancy, thus allowing the home owner to sell the freehold or bare ownership of the property while keeping their user rights. This concept in continental Europe is often called Usufruct or Viager.
The scheme is designed to provide the utmost flexibility, both in determining how you wish to access the released capital, by offering the option of receiving either a tax free lump sum or a life time annuity income. A combination of both is available depending upon your personal circumstances.
This type of arrangement may also be efficient when considering any inheritance tax planning. Your estate may benefit whichever option you choose. You also have the choice of leaving your property or renting it out and receiving additional income.
All of the above options use the legal structure known in English Law as a life tenancy. Within this structure, your rights as the occupant of the property are legally registered on the title deeds, which is a similar process to a mortgage, but more encompassing. Therefore your life tenancy is assured and the purchaser (which in my company’s case is a property fund) retains the bare ownership of the property.
How much would I receive
Typically the amount you would receive after the deduction of future maintenance costs in lump sum terms could result in you receiving up to 65 per cent of your property value. This may rise to nearly 80 per cent if you accept to receive instalment payments.
Some of the key benefits of home reversion can be described as follows:
Flexibility
You can choose to receive either a lump sum or a combination of a lump sum and an income stream depending upon your personal circumstances. The income stream provides you with extra monthly income either for life or for a fixed period of time. Additionally if you choose to move out of the property in the future you can rent it out to someone else and receive the additional rental income.
Release capital tax efficiently
Any lump sum released is generally tax free and the income stream paid in the form of an annuity has the advantage of being taxed at a very low rate.
Reduces the cost of ownership
Property maintenance will be the responsibility of the new owner of the property so removing all worries about coping with future upkeep of the property
Financial security
Security is provided by a legal charge on the property, which prohibits the sale of the property for the duration of your lifetime and protects the capital. The income stream is also protected by a reversionary clause in the context whereby in the event of default on the income payments the property reverts back to you. Off course the income is also secure from any down turn in the investment markets.
If my spouse dies can I stay in the property?
Yes, if you are a couple and one of you dies, then the survivor automatically has the right to stay in the property until his or her death.
Should I consider home reversion and not equity release?
The difference between these two arrangements is that with home reversion you are actually selling your property in return for a guaranteed capital and income arrangement together with a lifelong tenancy.
However, this must be considered very carefully for example if you were planning to pass your property to other family members this option would of course no longer be available. Also once the transaction has taken place it could not easily be reversed (if at all).
Of course, both equity release schemes and home reversion schemes are very new to the property market here in the Algarve. My company has gained much experience of the use and benefits of these schemes in other markets such as Spain, UK and France, where these financial arrangements have been available for some time.
In the right circumstances they can and do provide an excellent facility to introduce new wealth to individuals in retirement and who may have also seen their income eroded by both inflation, poor investment returns and of course the realisation that UK pension funds are not as safe as we were all lead to believe.
However, I must stress that it is crucial that anyone considering any kind of scheme that involves the security of their home must be absolutely sure that they have understood the arrangement in full and have sought expert financial advice concerning this matter.
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