Last year, a record £3.94bn was raised by 83,000 homeowners over the age of 55. Yet the figure could surpass £5bn in 2019 after figures released this week by the Equity Release Council showed the strongest start to any year on record.
Harnessing the huge appreciation in property prices might be filling the pensions gap for older generations, but it can also dash the inheritance hopes of the next — and politicians are also eyeing housing equity as a means of funding social care. Although Equity Release rates are coming down, experts point out that it’s important to be aware that these rates are still very high compared to both traditional mortgages, and also the Bank of England base rate (the rate at which it charges lenders when they borrow money). Along with high interest rates, some products have high arrangement or exit fees, and generally offer a bad deal.
A lifetime mortgage can end up costing more than three times what you borrow after 20 years, according to calculations from consumer group Which? In the worst-case scenario, you could even end up owing more than the value of your house, though reputable providers have a “no negative equity” guarantee. Home reversion schemes can also be terrible value, with some demanding more than 70% of your home’s value for just a 20% advance. It’s also worth being aware that if you release equity from your home, you may not be able to rely on your property wealth later in life to fund long-term care or pass on an inheritance. As ever, If you are considering equity release, make sure you seek independent financial advice.
The buy-to-let tax squeeze
Landlords of UK buy-to-let property have responded to the government squeezing their returns by selling assets, triggering a bumper 18.6% rise in capital gains tax payments. Data released by HM Revenue & Customs this week revealed the CGT tax take hit a record £9.2bn in the 2018-19 financial year, up from £7.8bn in the previous 12 months. CGT applies to gains made from the sale of assets such as second properties and stocks and shares. All taxpayers have an annual CGT exemption of £12,000. Above this amount, lower-rate taxpayers pay 10% on capital gains and higher and additional rate taxpayers pay 20%. However, people selling second properties pay CGT at 18% if they are a basic rate taxpayer or 28% if a higher or additional rate taxpayer. Analysts attributed the hefty rise in CGT receipts to property taxes changes in the past two years that have led buy-to-let landlords to sell assets. Landlords are, in effect, being caught in a very effective pincer movement from the taxman. From one side the higher rate tax relief on mortgage interest is gradually being phased out and making letting out properties less profitable. From the other side, landlords looking to sell buy-to-let properties are being squeezed with an extra 8% capital gains tax.
The loan charge problem
In a report recently released by ContractorUK, it was revealed that 69% of UK contractors have admitted that HMRC’s retrospective loan charge is having a detrimental effect on their mental health. The loan charge relates to disguised remuneration schemes, whereby workers were paid via loans rather than salary, and, as a result, did not pay income tax on their earnings. From Friday 5 April, the 50,000 contractors who previously avoided NI and income tax using schemes that paid them largely in loans now face charges. A matter of contention is that while contractors are expected to pay the full amount, the companies that advertised these loans will receive no penalty. Over half (56%) feel that these companies should, at least in part, pay the charges contractors have been faced with. Many commentators believe the current plan will potentially put people out of their homes and, worse than that, the loan charge has been allegedly linked to a number of reported suicides. While the suggestion of an increase in the number of suicides is purely alleged, it is undeniable that pressure from HMRC is causing significant strain for a sector already struggling in this current climate. In fact one watchdog probing HM Revenue & Customs over the suicide of a person facing the controversial loan charge has recommended the tax authority carry out further investigation.
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