Should I advise my elderly parents to stay away from equity release programs? – The Irish Times

My parents live in their own house and their only income is the state pension, so they are quite limited financially.

Lately they have been looking at stock release programs and similar options which makes me a little nervous when some of the terms and conditions are considered. In the meantime, I tried to think of ways to help them.

As I have accumulated savings for many, many years (€100,000), I considered buying the house from them with my money and having an agreement drawn up so that they would be entitled to stay in the house until upon their death. I don’t live in the same part of the country so I don’t plan to live there.

Apparently the house is worth €160,000 but I can’t afford more than €100,000. I wonder what the impact of the shortfall might be? I read something about donating the rest, but I don’t know if it applies in this case. Would there be a tax impact for my parents and/or me? If my parents had to pay 52 p. 100 of that income would defeat the purpose of helping them. Likewise, if it would have an impact on their pensions or any other state benefits.

Finally, my parents leave the house and my three siblings to me by will unless, of course, they sell it to a financial institution.

Mr. MM, e-mail

Stock release programs have a place in the market, but they are, in my opinion, the lender (or buyer) of last resort.

To be fair, they lend money up front with repayment or access to the asset that’s not available to them until some indefinite date in the future, so you can see why their offers or rates interest could be less than generous.

But that’s one more reason to look for alternatives.

Your position is typical of many families in Ireland – elderly parents who are financially constrained now that they are retired and with their home as their main family asset.

It makes sense that your parents are trying to free up funds from their home so they can make their life a little easier financially. Naturally, this means there will be less inheritance available to the family when he dies, but, as any regular reader knows, I see no problem with that.

As parents, they will have invested much of their time, energy and money in raising the family so that they are able to fend for themselves financially. And the house in which it all happened was their biggest financial investment in their working lives. They absolutely have the right to use it to make their lives easier.

Equity release follows two distinct models. There is a life loan model where a financial services company lends an initial amount – based on the value of your property and your age – and charges interest that accrues until the owners die. At this point, the loan, including accrued interest, may be equal to the value of the home, although it may be less.

The only player currently in the Irish life loan market – Seniors Money, which trades as Spry Finance – pledges that its bill will never exceed the value of the house against which it was lent.

The second equity release model is where the finance company buys a portion of your home. Inevitably, the rate if bids are only a fraction of the actual value. Ian Higgins, the managing director of Home Plus, Ireland’s only operator in this space, gave the example of a couple aged 67 and 70 looking to free up 25% of the value of their home. To do so, they would have to cede more than 72% ownership to his company.

So I can see why you would be worried.

On the other hand, your available financing to help them is around €100,000, well below the real value of the property. So what can you do?

You could pay over $100,000 and ask your parents to give you the balance of its value. This would be well below the lifetime limit of €335,000 that you can receive from your parents before having to pay the 33% capital acquisitions tax.

However, this could cause family conflicts. This house is the main part of your parents’ estate and, as you say, is divided equally between you and your three siblings in their wills. Paying them for the house is one thing, but offering you the balance reduces your siblings’ inheritance and that might not go over well.

You may want to return instead to the concept of equity release…but with the equity released by you instead of a trading transaction. Your available €100,000 is 62.5% of the current value of the house if it is indeed worth €160,000.

You could buy out part of your parents’ house, with the balance available for all four siblings – or whatever arrangement your parents decide – when they die, ideally with a provision for one or more to buy out the others.

This would involve a formal valuation, solicitor and stamp duty, but it’s not particularly onerous – and can easily accommodate the abode right behind the whole scheme.

From your own perspective this would also be considered investment property and you would face a capital gains bill on any further sales from you, but it is doable and certainly better value for your parents than commercial equity. Release.

Tax-wise, there’s no problem for your parents, whichever path you take. They sell their family home or part of it. The family home is not subject to capital gains tax, nor will it be subject to income tax, PRSI, or USC, as you seem to fear.

As long as they receive contributory public pensions, this will have no impact on these payments. As the first £72,000 of savings for a couple is not taken into account in the medical card means test, there should be no problem there either.

If however, they are in receipt of non-contributory state pensions, the windfall would impact their weekly payments, so you may need to think again. Mind you, the same would be true if they opted for a trade equity release option.

They may want to review their will to make sure the arrangement is clear as well as any outcome of it upon their death.

Please send queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or email [email protected]. This column is a reading service and is not intended to replace professional advice

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