Using a Home Reversion Plan to Reduce Inheritance Tax

IntroductionWith the formal regulation of sales advicecash gifts to relatives. As long as they survive the time
and general regulation of the Home Reversion Marketthe gifts are given by seven years the donors avoid
set to be introduced in April 2007, this article discussespaying IHT on this amount under potentially exempt
what they are and how using one can potentiallytransfer (PET) rules.In the example above, were the
reduce Inheritance Tax (IHT) liabilities.Home Reversion72-year-old couple to sell a 50% share in their home,
Plans in DetailBecause big name providers favourthey would live rent-free rent free in the property until
lifetime mortgage products, Home Reversion Plansdeath. On death their inheritors would get the remaining
have been overlooked for a number of years, buthalf share of the property. If the value of the half
comforted by new regulation and a tougher sales andshare remained the same at £250,000 this would
advice regime many experts are expecting thefall below the current IHT level of £285,000.
market to grow in the next few years.LifetimeHowever, if the inherited the house without the HRP in
mortgages, where homeowners release cash byplace they would have to pay IHT of £86,000 on
taking out a loan on their home make up the lion'sthe full value of the home.The big risk to anyone
share of the growing £1billion equity releaselooking to take out a HRP is that nobody can predict
market and Reversion Plans only currently account forwhat will happen to house prices, IHT policy or indeed
only £54million of this total, but from mid next yearHRP legislation in the future. There are a lot of
this trend is predicted to change.In simple terms Homevariables to consider a future government might get rid
Reversion Plans (HRPs) are where you sell all or partof IHT or if property prices continued their march to
of your home in return for a lump sum or a series ofeven headier heights the inheritors might lose out. In
payments. The person taking out the HRP thenanother example, if you were to die shortly after taking
effectively becomes a tenant in their own home without a HRP the heirs would be much worse
the right to reside there until they die or move out. Howoff.Potential customers should think about the costs of
much you get for selling your home depends on yoursetting up a HRP. At the time of writing set up fees
life expectancy, which will be influenced by a numberand generally between £1,000 and £1,500
of factors including your age, gender and health. Inand are then followed by a property valuation and
short the longer you are expected to live the lower thesolicitors' fees. This means the total could rise to
amount of money you will receive as settlement of aaround £2,500 depending on the circumstances
HRP.An example of a HRP is a couple aged 72 with aand complexities of the case. All the companies who
£500,000 home could get 40-45% of the value ofoffer HRPs have different requirements for application,
the proportion they sell. If they sold 50 per cent of thegenerally starting with a minimum property value and
house and received 40% of that sum, this wouldalso a minimum age requirement.One thing to bear in
equate to a lump sum of £100,000 (i.e. 40% ofmind is that for low-income families the injection of
£250,000). The homeowners retain the right tocash from the HRP provider can affect state benefits.
live in the property rent-free until they die, but would beAnother thing to consider is that once you commit to a
responsible for maintenance and upkeep of theHRP there is no way out of it. It is strongly advised
property. On death of the owners the property wouldthat anyone considering a HRP discusses all the
be sold by the HRP holder and after deducting costsdifferent options with their families. Some people argue
they would receive the sale proceeds from theirthat a house is security and security should always
proportion of the property.With more and moretake priority over tax planning.Adrian has a background
households being dragged into the inheritance tax netin Finance and Information Systems Consultancy and in
(IHT), some people believe HRPs could become more1997 formed his own Company with several
of a mainstream IHT planning tool. Homeowners canassociates. At the moment, the thing eating up most of
effectively cut their IHT bills left to their heirs by takinghis time is the secured loans specialist website We
some of the value of their property and then makingIntroduce You.