equity release and whole of life combined to improve estate planning
Close Brothers has launched a fund to mitigate inheritance tax (IHT) on the home through the use of equity release and single premium whole of life policies.
According to Close Brothers, the Property Wealth Manager, an Isle of Man-based fund, is not caught by the pre-owned assets tax and the HM Revenue & Customs has provided written confirmation of its approval of the product.
The Property Wealth Management product has been launched in conjunction with Equity Release Services, an organisation that white labels its expertise for intermediary and insurance firms.
Ged Hosty, managing director of Equity Release Services, said the first stage of Property Wealth Manager is for the investor to take out a home reversion plan. The investor's house is transferred at its current market value to the plan. In return, the investor receives a lease back of the property, so he can continue to live in the house until death, and a cash lump sum.
The cash lump sum is then invested in a single premium bond written by Isle of Man Assurance on the investor's life. If the house is jointly owned, the bond is set up on a joint life basis. This bond will then invest into the Property Wealth Manager fund, which holds the properties of all investors using the product. The number of units allocated to each investor will be determined by the value of their house.
By giving units in Property Wealth Manager to children, grandchildren and other beneficiaries, Hosty said the investor makes a potentially exempt transfer. This means if the investor lives for another seven years, there will be no IHT to pay on these units. The amount of IHT that is payable on death declines over the seven year period.
He added: "After 30 years, the product is no better than doing nothing because the charges erode the benefit of mitigating IHT."
Capital gains tax is payable on the death of the investor, however, on the difference between the premium paid and the surrender value on the day before death. Hosty said the surrender value rises in line with the assets in the Property Wealth Manager fund. These assets are determined by all the houses in the fund and not just the property owned by each investor.
As an example, Hosty cited a 75-year-old couple who own an £800,000 house and died after seven years. He added: "Assuming 5% a year house price inflation, the house will be worth £1,125,000. After sales costs this will deliver £1,086,000 and £636,000 after taxes. But with Property Wealth Manager, the bond proceeds would be £989,000 after charges and £896,000 after CGT. This means the couple's estate would be worth an extra £260,000."
Investor must be aged 65 or above.
Property must be worth £200,000 minimum.
Property must be principal private residence in England or Wales.
6.5% establishment charge on bond and 0.3% annual fee.
Property costs estimated at 0.7%pa.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till