Would equity release taxation help solve the downsizing problem?

Claire Barker | Managing director, Equilaw
9th October 2018
Claire Barker Equilaw
"There is absolutely no doubt that duty tax charges have contributed to the decline in people choosing downsizing options over the past few years."

With figures for the second quarter confirming a 12% increase in equity release lending on the first three months of this year and a 39% rise on the same period for 2017 (according to the Equity Release Council), there is a growing sense of opinion to suggest that these products represent a new ‘mainstream’ for later-life finance options and should be taxed accordingly in order to assist the downsizing market and to tackle the worsening housing shortage in the UK.

Under current lending regulations, customers are allowed to unlock equity from their property’s tax free (although, any money which is subsequently invested or put into savings is liable to taxation on the basis of growth). However, many estate agents argue that the high costs involved with downsizing (such as stamp duty, conveyancing fees and moving expenses) act as a significant deterrent to potential movers (with only one in five of homeowners over 55 prepared to consider it according to recent research by Retirement Advantage and only 90,000 property owners choosing to move to smaller homes each year according to Savills) and are unfair by comparison. But is taxation the answer to this problem?

Writing in another industry publication Andrea Rozario says it is not and I’m inclined to agree. There is absolutely no doubt that duty tax charges have contributed to the decline in people choosing downsizing options over the past few years. However, there is also little evidence to suggest that taxation on ER products would help to make up for the current short-fall in retirement homes and other suitable properties for them to move into or even generate enough revenue to make up for the thousands of pounds charged on duty tax in the first place. Some estate agents assert that these shortages have been compounded by the number of equity release customers who choose to remain in their own homes and this may very well be the case. But the reality is that many of them do so in order to avoid duty tax and the other assorted fees outlined above.

Merely placing taxation on these products would inevitably reduce the current levels of uptake that the industry has experienced over the past two years or so (thereby reducing revenue streams), exacerbate existing pension problems and lead to a scenario in which both options become unpalatable. Indeed, if we can accept that equity release owes much of its popularity to the expenses associated with downsizing, then surely the way in which to boost this drive is by applying pressure to the government to rescind stamp duty tax for pensioners and get the housing market working again.

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