Equity release interest on inherited property

Can client deduct equity release interest from a capital gain on inherited property

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Hi

I have a client who inherited half of his parent's property ten years ago when his father passed away. Some years before his father's death the client's parents took out equity release on their property.

The property value when my client's father passed away was £400k and in the ten years since it has increased in value and was sold for £525k. Equity release loan balance on the date of father's death has been roughly calculated at £233k and the balance on the date of the sale was £389k. 

Given my client did not benefit from the equity release I would have presumed that we would claim a deduction for the equity release interest etc but I can't see anything online or on this forum to back this up and I am hoping some users on here might provide some advice and guidance for this. Many thanks in advance. 

 

 

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DougScott
By Dougscott
19th May 2024 12:27

So was the house empty for 10 years???

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Replying to Dougscott:
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By Jakarmi
19th May 2024 12:33

No sorry.

His Dad passed away in 2014 and left his half of the house to my client. The client's Mum continued to live there but has had to go into a nursing home recently and so the house has now been sold for a greater value than it was at the time he inherited it.

Client would have lived in the property as a child but hasn't lived there since he inherited it.

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By Tax Dragon
19th May 2024 15:54

Is it possible that your parents took out joint equity release when they were joint tenants and then severed the joint tenancy without telling the lender and in breach of the terms of the loan?

It's a shame Justin isn't here at the moment and cannot comment, as he might have had something useful to say. In his absence, you'll get responses only from muppets who don't understand, such as me. In such a situation, I could not tell you even who had what liability in law. But then I am not a lawyer.

I can tell you the answer to your CGT question. There is no CGT relief for any part of the loan or interest on the loan.

I should add that your question may not be the most apposite, depending on the legal situation - not something I am going to speculate about.

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Replying to Tax Dragon:
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By Jakarmi
19th May 2024 16:17

Thanks TD.

Feared it might not be tax allowable with what I'd read but doesn't seem fair given parents had and spent the equity release monies. Was hoping it was incorrect.

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Replying to Jakarmi:
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By Tax Dragon
19th May 2024 16:46

My post has been erased because I tried to make a minor clarification. I'm reporting myself.

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Replying to Tax Dragon:
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By Paul Crowley
19th May 2024 17:57

Confused
Usually if edit expired there is nothing that can be done to amend, unless you asked the mods to amend and they messed up.

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Replying to Tax Dragon:
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By FactChecker
19th May 2024 19:17

Can't see a problem with ...

By Tax Dragon - 19th May 2024 15:54

Is it possible that your parents took out joint equity release when they were joint tenants and then severed the joint tenancy without telling the lender and in breach of the terms of the loan?

It's a shame Justin isn't here at the moment and cannot comment, as he might have had something useful to say. In his absence, you'll get responses only from muppets who don't understand, such as me. In such a situation, I could not tell you even who had what liability in law. But then I am not a lawyer.

I can tell you the answer to your CGT question. There is no CGT relief for any part of the loan or interest on the loan.

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Replying to FactChecker:
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By Tax Dragon
19th May 2024 19:49

I edited that post to append:

I should add that your question may not be the most apposite, depending on the legal situation - not something I am going to speculate about.

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By FactChecker
19th May 2024 15:59

Follow the figures (which is more than I can do in the absence of facts) ...

Equity release:
- when? how much received (and by whom)? what %age of equity released? etc

Father's death:
- how was house valued (and equity release handled) for IHT? was 'half of parent's property' before/after released equity? etc

Mum to nursing home:
- when? equity release loan balance? any other factors (avoiding nursing home fees)? etc

... and of course, which client(s) and which taxes (just CGT or ..)?

EDIT: took a break from typing to plant a bush (in between cloudbursts), so TD has made as always more pertinent and concise points (albeit covering some of my 'suspicions' whereas I was simply trying to say 'go search for actual facts').

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Replying to FactChecker:
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By Jakarmi
19th May 2024 16:25

Thanks for replying FC.

Not sure of equity amount / percentage. ER monies received / sold to client's parents as a way of funding their retirement. Was certainly received and spent some years before the client's father's death.

Father's death - we have had a local estate agent prepare a report of home much the house would have been valued at around the time of his father's death so this would have been quite recent. My understanding with the ER is that the balance just continued as the full amount has been paid by the solicitor as part of the Completion Statement.

Client's Mum went into the Nursing Home in the summer of last year. Don't have the exact ER balance at that time but would estimate it to be around the £370k mark. After the client's Mum went into the home then the house was cleared and placed on the market.

We're looking at CGT with this as my client inherited the property and has a CGT liability based on the increase in value on the property since his father's death.

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Replying to Jakarmi:
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By Tax Dragon
19th May 2024 16:50

Is there IHT on mum's estate? Would there have been had the property been 100% hers?

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Replying to Tax Dragon:
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By Jakarmi
19th May 2024 16:55

I think the logic of leaving the Dad's share of the house to my client was probably in relation to avoiding IHT.

The client's Mum hasn't passed away to clarify but she has had to go into a nursing home and her half of the house proceeds and any cash she had will be used to pay her home fees for the rest of her life. I don't believe there was much in way of cash balances at the time of her going in the home.

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Replying to Jakarmi:
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By Tax Dragon
19th May 2024 18:15

My initial (currently invisible) questions still stand (I notice you didn't answer).

But - unless this was part of a much bigger arrangement - I'm struggling to see anything passing for good IHT planning here. If you have understood and presented the situation correctly, it was certainly atrocious CGT planning.

DIY?

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Replying to Tax Dragon:
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By Jakarmi
19th May 2024 18:21

I didn't realise there were unanswered questions sorry and I can't now see the original response.

Not sure to be honest with the original advice or who gave it. I guess by chance it might turn out to be decent advice as the client's half share of the house would now be taken up by the nursing home fees if it just went to his Mum.

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Replying to Jakarmi:
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By Paul Crowley
19th May 2024 18:25

This sounds like care cost planning rather than IHT planning. Both can be described as estate planning.
We are missing the original TD post, which is the loss of a valuable contribution.
Dad achieved the aim. Pass over half of the equity in the house. That equity has increased in value.
Planned properly mum would have paid the full loan as it was mum and dad that spent the equity release, resulting in mum ending up with less money.
Care costs are like a 100% tax on the estate.
I can see no reason for son to be able to claim interest paid against the CGT on the sale.
Has son made loans to mum?
If so then when the care cost assessment is made then son should have been repaid his loans from the sale of the house.
When the equity was released, was son the recipient of gift? That would be the norm in these circumstances.

If it was care cost planning, then all three should have known the aim and acted accordingly.

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Replying to Paul Crowley:
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By Jakarmi
19th May 2024 18:37

Thanks for the response.

His Mum give £5,000 as a gift to him and his son before the house sale. There wasn't anything else really to give.

Son not made loans to the Mum.

I don't believe son was gifted money from the parents when equity release taken. Son wasn't aware they had done it until some time after it had happened and tried to challenge it at a later date on behalf of his parents that they were mis-sold it and would not have realised how much in interest it would cost them when they signed it. His challenge didn't get anywhere though.

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Replying to Jakarmi:
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By Paul Crowley
19th May 2024 19:09

Sounds like mum and dad had their seasons in the sun.

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Replying to Paul Crowley:
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By FactChecker
19th May 2024 19:25

But possibly (in Mum's case) not for much longer ... as in, if one part of the 'plan' was to denude Mum of cash (with a view to avoiding care home fees), then there may be a very rude shock awaiting round the corner.
Specifically there are a lot of bits of legislation (sorry to be non-specific but it's a Sunday evening) that will deem actions designed to diminish her savings for that purpose as not having taken place (sort of similar to GWROB for IHT).

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Replying to FactChecker:
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By Jakarmi
19th May 2024 19:35

I'd presume that with this put in place over 10 years ago and his Mum not at the time having any expectation of care that this wouldn't be an issue. She's had the financial assessments etc and there's not been a problem.

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Replying to Jakarmi:
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By FactChecker
19th May 2024 19:44

I'm not saying there will be a problem - just that it's not that uncommon.

DWP's view is that the only people who have no expectation of long-term care are the terminally ill (harsh but not unrealistic from an actuarial perspective).
10 years ago is certainly better than a more obvious 'in last 6 months' (which happens all too frequently), but is not a guaranteed shield - hence someone else asking what Mum & Dad did with the money?
[Again not for answering here - but the kind of question that may crop up if/when any official decides to review the financial assessment and dig into the past.]

But this aspect is not my focal point - which remains that someone (preferably a professional) needs to collect a lot of information and then review what happened, and was declared, at each of the key events that I originally mentioned.

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Replying to FactChecker:
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By Paul Crowley
19th May 2024 19:36

I agree
But the people that should enforce them are usually challenged by lack of information.
£370K is a big hole, either it was spent, given away, or is missing in an unknown bank.
Either way, mum probably knows where it went.

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Replying to Paul Crowley:
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By Jakarmi
19th May 2024 19:47

The impression I get is his parents took equity release of £100k - £150k in the early 2000s as a way of funding their retirement. It ends up being £389k on the house sale due to the compound interest continuing to accumulate every month over 15-20 years (with the interest rate rises my calculations show a £2k per month interest charge in the final months before sale).

Money I assume got spent in the period between ER and today's date on their retirement.

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Replying to Jakarmi:
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By Michael Davies
20th May 2024 10:12

More likely to avoid Care Home fees,when the time came.In theory it doesn’t work;however it seems quite arbitrary whether the Council go down the deprivation route.

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Replying to Michael Davies:
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By Tax Dragon
20th May 2024 10:58

Where is the deprivation in the scenario laid before us?

I still question the lawfulness of what may have been done [OP did not confirm or deny] - and, if not lawful, whether what is alleged to have happened actually did happen - but [borrowing Justin's hat in his absence] if the only parties that could challenge don't challenge it, and if HMRC is not among those parties... I guess what's done is done, and tax treatment follows what is done.

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Replying to Tax Dragon:
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By Jakarmi
20th May 2024 19:43

It isn't a deprivation scenario. Not sure why some are assuming that to be honest.

I can't really answer the legal situation. Parents took the ER out 20 years ago and their son found out 10 years later what had happened after this father died. Likely scenario is his Dad arranged it and he wasn't there to answer the questions his son had of why on earth he'd done it.

There probably would have been a better way to split the house sale up but that's on the solicitor not me. My job is just to work out the taxable gain which is why I asked the question and I am grateful for everyone's advice to get to the right answer.

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Replying to Jakarmi:
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By FactChecker
19th May 2024 19:36

Sorry, I wasn't clear ... in that my questions weren't seeking answers for a public forum - just examples of the sort of (so far) missing information that might help you (or more likely an advisor) to "follow the figures".

FWIW I've no experience of Equity Release - but was under the impression that most of such schemes involve a transfer of at least some of the property equity (either at time of 'loan' or on disposal or on death) to the finance provider?

Anyway, before I unintentionally stir things up even more, my core suggestion is find and appoint a professional adviser - who will want to know all the facts to which I alluded (and more), but should then be able to provide clarity.

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Replying to FactChecker:
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By Jakarmi
19th May 2024 19:49

My understanding of Equity Release is they give you an amount of money (usually up to a percentage of your property value) then continue to charge interest on this each month. They create a charge against your property so they can recover whatever they are owed.

Like taking an interest only mortgage but you don't actually pay the interest each month.

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Replying to Jakarmi:
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By FactChecker
19th May 2024 20:05

I did say that "I've no experience of Equity Release" (professionally), but enough of my acquaintances have succumbed for me to know that there are multiple providers each with their own specific 'offerings' and approach to usury.

So, once again, you (or hopefully your adviser) need to know *not* what your (or my) understanding is of the concept generally, but what the contractual terms of the specific agreement state. All the way from what did the original contract state through to what was the position of the provider once the property was sold.

But, for the avoidance of doubt, I'm not providing advice - I'm not qualified to do so and anyway am fully retired - I'm merely pointing out how much you really need to appoint a professional adviser (and how much more info they are going to need).

As per Dragon's Den - good luck but I'm out.

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Replying to FactChecker:
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By Jakarmi
19th May 2024 20:37

Thanks FC.

I'm the advisor for the client with his tax. As detailed above he had no knowledge of his parents taking out this ER until about a decade after it had been taken when he was made aware of it after his father's death. He doesn't want to go to his 93 year old Mum's nursing home and start questioning her what she spent her money on in the 2000's either.

There's probably a question mark on the legal / financial advice the three of them have had along the way but the question was more checking if the interest on the ER could be deducted off the client's Capital Gain (as he never benefitted from it nor spent it) and I think that's been covered that he cannot.

Thank you to everyone that answered and sorry to ask a question on a Sunday.

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By CMED
20th May 2024 18:13

The bit that I can't get over is:

'but doesn't seem fair given parents had and spent the equity release monies.'

It was their money to spend.

Am I missing something?

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Replying to CMED:
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By Jakarmi
20th May 2024 19:37

I don't think there was an issue that it was their money to spend. It just seems unfair that the son inherited half of a house ten years ago, loan interest accumulated on that in ten years for an equity release that he received no part on and that that interest can't be a deductible expense against his capital gain (or that his gain should be lower as a result) when it's clearly affected his return on the property.

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Replying to Jakarmi:
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By Tax Dragon
20th May 2024 19:51

It could be that the perceived unfairness is a consequence of a possible breach of the terms of the loan, rather than of a tax system that fails to provide tax relief for such actions. In the alternative, that, as CGT would not have arisen had Dad's half gone to Mum (or a trust for Mum to protect the remainder for the children) the tax bill is the consequence of planning against fees (as has now been assumed) rather than taxes.

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Replying to Tax Dragon:
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By Jakarmi
21st May 2024 09:09

A lot of will writers in our area (around the time this was set up) would advise their clients that there was a potential danger if they passed away and left their half of the house to their spouse that if the spouse remarried and then also passed away that new husband / wife would then be automatically left the whole house and children would then get nothing.

I'd presume (even if there was a better way of doing it) that this was the likely intention of leaving half of the house to the son when one of the parents passed away rather than automatically assuming it was a dodge on any potential care fees.

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Replying to Jakarmi:
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By Paul Crowley
21st May 2024 10:08

Disagree
45 years ago my Dad suggested that the house should be transferred to the three children. At that time I had no idea why, and it was a casual remark that I did not understand the point of. I pointed out CGT and it was not brought up again.
One of the other articled clerks, Was indeed the joint owner of his parents property.
Care cost planning really is that old, and the people who discussed it always said that any tax is cheaper than 100%, which is the care cost tax rate.
IHT avoidance is legal even though it is a bargain at 40%. Because of that, care cost planning is perfectly legal unless it is too late.

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Replying to Paul Crowley:
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By Tax Dragon
21st May 2024 10:23

I don't normally trade stats in here. But it is important to have a sense of proportion on this topic and imho "100%" is scaremongering, because most people won't spend anywhere near 100% of their wealth on care home fees. Most people spend less than 2 years in a care home. £120k is more than likely to cover your cost.

In comparison, OP's client has 'lost' twice that on equity release interest.

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Replying to Tax Dragon:
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By DJKL
21st May 2024 10:36

You have cheap care homes, £120k for one year and a bit yes, not sure it covers two.

I have decided to Thelma & Louise (without the Louise) when the time comes (if at that time I still remember) Reliant Scimitar 1600 hurtles (well trundles 0-60 takes over 10 seconds) over a cliff into the Forth

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Replying to DJKL:
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By Tax Dragon
21st May 2024 10:48

I don't know whether my stats include you and Thelma.

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Replying to Paul Crowley:
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By Jakarmi
21st May 2024 10:33

Who knows. Again there would be more than one reason for doing this. The Council did their financial assessment on the client's Mum before she went into a home and had no problem with these sorts of things either.

The question has been answered and it's no real point continuing any speculation why someone who passed away and his wife (who is in a nursing home) did what they did with their property as it's irrelevant to the question anyway and those with the facts don't see it as an issue.

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Replying to Jakarmi:
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By Paul Crowley
21st May 2024 14:44

This forum is not intended to be just for the benefit of someone who asks a question.
It is intended as a discussion point for all members, and a resource for those with similar issues.
The start point of any answers is to suggest that it is worth looking to see if the question has been asked before
'How to use Any Answers
After checking whether your question has been asked before, click the yellow Ask a Question button and type away. The system will want you to enter a heading, a more detailed summary and a bit of detailed text setting out the question.'
https://www.accountingweb.co.uk/any-answers/how-to-use-any-answers

If you have got what you want then feel free to move on. You got your answer in the third posting.

Other members may have more to discuss on the topic and expand the nature of the question.

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Replying to Paul Crowley:
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By Tax Dragon
21st May 2024 15:08

But Paul, your previous comment started "Disagree", which did make it sound like you were talking about OP's case. Had you been posting for the benefit of future readers, you could have opened with say "widening the discussion..." or not posted as a reply to the preceding comment.

Or even pointed the future reader to the other current thread on the topic, which is more of a general discussion of the issues (as per the purpose of this forum) rather than this case-specific one.

On specific cases... I realise that my £120k budget paid for Thelma and DJKL [.oO what a movie that was] and still left me change for someone else.

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SMH
By ShakingMyHead
22nd May 2024 07:59

Just to chime in...

I'd imagine the money they released was spent literally just on 'living costs'... If mum is 93, then that's maybe 30 years of retirement... When the client inherited the property 10 years ago, they also inherited the associated equity release loan, as it is typically secured against the property itself. You've taken the loan to live. It's not really an 'allowable expense' otherwise we'd all take out loans 'to live' and try and claim it on our tax returns! The client inherited a depreciating asset. But £2000 per month interest in the later months before the property was sold is shocking.

But this seems to be life... people scrimp and save to buy their house...they go without... they struggle... to just release the payments again later on to live! Pay for heating and food (because you can't eat bricks and cement).

Nothing worse than spending '£120k' in 2 years in care home fees... think about what a good time it could have bought you, a few years earlier. I hope I have a swift exit. Nothing worse than lingering and all that money is just going on care home fees. What was the point?! BUT this is the potential outcome facing many. As someone pointed out - only 2 things are guaranteed... death and taxes!

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Replying to ShakingMyHead:
paddle steamer
By DJKL
22nd May 2024 14:59

Yes, a lot of people seem to think of their home as an asset for retirement but are in reality unwilling to downsize to release any of it, so they take out the equity release loan and it rolls up, compounding.

The number of individuals I have come across with virtually no savings, no pensions and just the large family home is positively frightening. (One reason I insisted that our non house savings were always worth more than the value of our house)

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By Tufdevil
22nd May 2024 14:48

Quick question. Was the property bequeathed by way of a trust, and, if so, did the trust provide that the widow could continue to live there as long as she needed? If so, there may be a case for Principal Private Residence Relief up until 9 months after the mother moved out. Of course, it would then be a trust gain and subject to a reduced annual allowance and top rate of CGT on any gain after the 9 months expired.

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