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Have you ever thought about investing in the booming Equity Release market? Somebody has to provide the capital needed for these plans! On the surface, investing in Home Reversion plans might not seem very attractive, the duration is uncertain, there is no yield and no liquid secondary market. However, on the positive side, there are no ongoing costs, no difficult tenants or voids to deal with and furthermore, if the property is held for 10 years or more, there is maximum capital gains tax taper relief at 40%. Home Reversion involves buying all or part of a property at a discount
of up to 50% and granting the tenant a rent-free lease for life.
When the tenant dies or moves into care, the home becomes yours.
The average period before the investment can be realised is ten
years. You could live in the property, let it or alternatively,
simply sell it. If the tenant is older and/or suffering impaired life, the discount will be smaller, because they are likely to die or move into care sooner. Properties that contain only female tenants will obtain a larger discount because of their longer life expectancy. What are the likely gains to be made on this type of investment? There are a number of unknowns, the eventual profit will depend on the discount obtained on purchase, the holding period, the performance of the property market, and the state of the property when it becomes vacant. Note that the maintenance of the property is the tenant’s responsibility. According to industry sources, Home Reversion investments being realised this year are achieving an average compound annual return of more than 18% a year before tax. You should take into account that if you sell the property immediately after the tenant dies or moves into long-term care, then you will be liable to Capital Gains Tax (CGT) on any gain, less buying and selling costs, indexation and CGT taper relief. How much does it cost? You should budget about 10% of the purchase price on costs, which
typically include conveyancing fees of £500 plus VAT; a finder’s
fee of up to 8% and valuation fees of about £300 plus VAT. Consider the risks. If you buy when the property market is overheated, you might pay too much even with the discount. Also, consider that life expectancy is increasing so you might have to wait longer for the proceeds than expected. However, providing you understand these risks, then Home Reversions as an investment can be a useful component of your pension planning. For further information, contact :
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