The home reversion plan was the forerunner of all of today’s equity release schemes. Simple in concept, it basically allows any London homeowner to sell a percentage of the property in order to raise a tax-free cash lump sum. The size of the lump sum is determined by the amount of the property that is sold to the home reversion company, the age of the homeowners & the valuation of the property.
How does a home reversion plan work?
Following transfer of full or partial ownership, the homeowner effectively becomes a tenant with the capacity to remain in the property for the rest of their lives, via a lifetime tenancy agreement. The tenant will still have the responsibility of covering maintenance issues and any bills associated with the running of the home.
Once the home reversion plan has started the tenant(s) will live there for the rest of their life. This will be until the last person has died or left to go into long term care. At that point the property will be sold, with the relevant percentages of the property value apportioned to each party.
Therefore, if 100% of the property is transferred then the home reversion company will take the whole sale value. Should it be split 60/40 in favour of the home reversion company they will take 60%, but importantly 40% is guaranteed to be passed into the estate of the tenants.
Another, important feature of home reversions is the unsold percentage will still benefit from any escalation in the property value. Therefore, should house prices continue to rise following commencement of the plan, then the beneficiaries will share this growth with the reversion provider.
How to calculate a home reversion
The amount that can be sold can be upto 100% of the property value. The amount transferred to the reversion company is heavily discounted as the new tenants will be living there rent free, in the property for the rest of their lives. In essence, the younger the applicants, the less capital will be paid by the reversion company.
Here are two examples how home reversion calculators can explain the concept of the lump sum provision: –
Example 1 – Showing the simple concept of a home reversion calculation would be a 65 year old male sells 100% of his £200,000 property value, then he is likely receive £74,000 of the property value, as a tax free lump sum.
Example 2 – Using escalation in the property value could be the 65 year old male sells 50% of his £200,000 property value and receives £37,000 as his tax-free cash amount. During the next 15 years his property value increases to £300,000. His equity stake in the property has therefore increased from £100,000 to £150,000, as he still guaranteed to retain 50% of the property value.
This is where the security of home reversion plans are favoured over those of lifetime mortgages, as home reversion schemes always guarantee the percentage of the property retained, will always be passed onto the beneficiaries. Therefore, for inheritance purposes a home reversion can still play an important financial planning tool for those with a large estate & looking towards inheritance tax mitigation.
Advantages of home reversion plans
Although home reversion now only accounts for a small percentage of the equity release marketplace, these schemes still have positive features which could be of benefit to many. Here we show both the pros & cons of home reversion plans: –
- the surety of tenure which is guaranteed until the last person dies or moves into long term care
- ability to guarantee a percentage of final property value to a beneficiary
- no monthly payments or rent are ever required with reversion plans
- for someone in good health, home reversion schemes can provide a higher maximum lump sum equity release
- if only partial transfer of any London property is undertaken, then the tenants will still share in any escalation in the house price growth
- for inheritance tax calculations, a home reversion plan can help mitigate inheritance tax by acting as a debt against the estate
- in times of stagnant, or falling house prices a home reversion can offer better value for money than a roll-up lifetime mortgage
- should you move house the home reversion is portable & can be transferred, subject to property criteria
- if only a partial reversion is taken at inception, then further releases of equity could be made on the remaining percentage
Disadvantages of home reversion plans
- you will no longer fully retain 100% ownership of your own home
- once ownership is sold, the reversion process cannot be reversed
- you will not share any house price increase on the percentage sold
- the home reversion company does not offer the full market value for the percentage of the property sold, as it lets you live in the property for the rest of your life with no rent to pay
- don’t tend to be as flexible as lifetime mortgage schemes as there are no enhanced home reversion or simple drawdown schemes
- the minimum starting age is 65 for home reversion, whereas lifetime mortgages start at the younger age of 55
- should you die in the early years, you would have sold a large equity stake in return for the actual lump sum sold
- if 100% reversion is taken, this could represent poor advice should house prices subsequently increase over the forthcoming years
Further advice on home equity plans
Should you have any further questions relating to the mechanics of home reversion plans, please contact the London Equity Release team on Freephone 0800 471 4842 who are looking forward to receiving your call.
Alternatively to find your nearest London home reversion adviser in order to book a home appointment, please complete our Find an Adviser contact form.
These are home reversion plans. To understand the risk & features of such home equity schemes, always request a personalised illustration.