My parents are living in their own home with their only income being the state pension, so they are financially quite constrained.
Lately they have being considering equity release schemes and similar options that make me somewhat nervous when some of the terms and conditions are considered. In the meantime, I’ve been trying to think of ways to help them.
Since I have some savings built up over many, many years (€100,000), I have been considering buying the house from them with my cash and getting an agreement drawn up so they have the right to stay in the house until their passing. I don’t live in the same part of the country so have no intention of living there.
Apparently the house is worth €160,000 but I can’t afford more than €100,000. I’m wondering what the impact of the shortfall might be? I’ve read something about gifting the remainder but not sure if that’s applicable in this case. Would there be a tax impact for my parents and/or I? If my parents had to pay 52 per cent on this income, it would defeat the purpose of helping them. Similarly, if it would impact on their pensions or any other state benefits.
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Finally, my parents have the house left to me and my three siblings in their will unless, of course, they sell it to a financial institution.
Mr MM, email
Equity release schemes have a place in the market but they are, in my view, very much the lender (or purchaser) of last resort.
To be fair, they are lending money upfront with either repayment or access to the asset not available to them until some undetermined date in the future, so you can see why their offers or interest rates might be less than generous.
But that is all the more reason to look at alternatives.
Your position is typical of many families around Ireland — elderly parents who are constrained in their finances now that they are retired and with their home as their major family asset.
It does make sense for your parents to try to release some funds from their home so that they can make life a little easier financially for themselves. Naturally, this means there will be less available for family to inherit when they die but, as any regular reader will know, I see no problem with that.
As parents they will have invested much of their time, energy and money in raising the family in the first place so that they are capable of standing on their own two feet financially. And the home in which all this happened was their largest financial investment in their working lives. They absolutely have the right to use it to make their own lives easier.
Equity release follows two distinct patterns. There is a lifeloan model where a financial services company lends an amount upfront — depending on the value of your property and your age — and charges interest which accumulates until the homeowners have died. By this stage it could be that the loan, including the rolled up interest, could equal the value of the home, though it could be less.
The one player currently in the Irish life loan market — Seniors Money which trades as Spry Finance — commits that its bill will never exceed the value of the home 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 offers is just a fraction of the actual value. Ian Higgins, the chief executive of Home Plus, the only Irish operator in this space, gave an example of a couple aged 67 and 70 looking to release 25 per cent of the value of their home. To do so, they would have to sign over 72 per cent of the property to his firm.
So I can see why you would be concerned.
On the other hand, your available finance to help them out is around €100,000, well shy of the actual property value. So what can you do?
You could pay over the €100,000 and then have your parents gift you the balance of its value. It would be well under the lifetime limit of €335,000 that you can receive from your parents before you have to pay capital acquisitions tax at 33 per cent.
However, it might cause family strife. This home is the main part of your parents’ estate and, as you say, is divided equally between you and your three siblings in their will. Paying them for the home is one thing but gifting the balance to you cuts your siblings out of their inheritance and that might not go down well.
You might want to return instead to the concept of equity release ... but with the equity being released by you instead of a commercial operation. Your available €100,000 equals 62.5 per cent of the current value of the home if it is indeed worth €160,000.
You could buy out part of your parents’ home with the balance being available for all four siblings — or whatever other arrangement your parents decide — upon their death, ideally with some provision to one or more to buy the others out.
It would involve a formal valuation, a lawyer and some stamp duty but it is not particularly onerous — and can easily accommodate the right of residence that lies behind the whole project.
From your own point of view down the line, it would also be considered an investment property and you would face a capital gains bill on any further sale of your share, but it is doable and it is certainly better value for your parents than commercial equity release.
In tax terms there is no issue for your parents, whatever path you take. They are selling their family home or a share of it. The family home is not liable to capital gains tax and nor will they be liable to income tax, PRSI or USC as you appear to fear.
As long as they are on contributory state pensions, it will not impact on those payments. As the first €72,000 of savings for a couple are disregarded in the medical card means test, there should be no issue there either.
If however, they are on non-contributory state pensions, the windfall would impact their weekly payments so you might need to think again. Mind you, the same would be true if they went for a commercial equity release option.
They might want to review their will to ensure the arrangement is clear along with any unwinding of it on their death.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
