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Tax implications of equity release


QUESTION: My parents own a property worth about £320,000 and we were wondering if we could release some equity for them by purchasing a percentage share of the property. There are three children and the house will eventually be left to us, but we would like to release about £50,000 now to allow them to enjoy the rest of their retirement without worry. Can you advise if this is possible and what tax and legal implications there will be?

For the low-down on how the schemes work, a good starting point is the booklet Raising Money From Your Home, available from the Financial Services Authority (fsa.gov.uk).

There will be no problem with capital gains tax as far as your parents are concerned, as they are selling off a part of their principal private residence (which is CGT-free). For the children who are buying it, there may be CGT to pay when they eventually sell the property, on the difference between the price at which they bought their portion, and its value when sold. In your case, given there are three of you and possibly wives or husbands involved as well, the likelihood of there being a major CGT charge is small, as you all have your annual exemptions to set against the gain. Where a greater proportion of the house is being sold, and perhaps just to one child, it may be sensible to set up the purchase via a trust, as this would avoid the CGT liability.

There is one tax spectre at the feast: the possibility that the "previously owned assets rule" would be applied. This would give rise to an income tax charge on the parents of the rental equivalent of the share owned by the children. However, the Treasury has made it clear this rule will not be applied where the transaction is carried out on an arms-length commercial basis. In practice, this concession should also apply in your case, as long as you are paying the "proper" price for your share, so it would be sensible to get an up to date valuation of the property before proceeding.

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