Understanding Equity Release, Life Interest Trusts, and Tenancy in Common

When it comes to property ownership and estate planning, decisions made today can have long-lasting implications, especially for those considering equity release or life interest trusts. This article explores the relationship between these concepts and offers guidance on navigating the complexities they present.

Tenancy in Common vs. Joint Tenancy

Most properties in England and Wales are conveyed as joint tenants, where co-owners have equal rights to the entire property. However, in recent years, some conveyancers have offered the alternative—tenancy in common—where each co-owner has a distinct share in the property.

This ownership structure is advantageous for estate planning but can complicate financial arrangements like equity release. It’s crucial for property owners to consider their long-term plans when choosing how to hold property.

Equity Release Options

Equity release schemes allow homeowners to access the value tied up in their property without selling it outright. The two primary types are:

1. Lifetime Mortgage – A loan secured against the home, repaid upon death or entering long-term care. Interest accrues over time, with the remaining equity distributed as per the owner’s Will.
2. Home Reversion Plan – The homeowner sells a portion of their property to a provider in exchange for a lump sum or regular income, retaining the right to live in the home until death or entering long-term care.

While equity release is straightforward for joint tenants, it becomes more complex for tenants in common.

The Challenge for Tenants in Common

In cases where a property is owned as tenants in common, each co-owner holds a distinct share. Upon the death of one co-owner, their share typically passes to trustees under a life interest trust rather than the surviving co-owner.

This can create challenges for equity release providers, as their investment relies on the full value of the property. If part of the property is held in trust, the provider may restrict additional borrowing or limit drawdown facilities.

Moreover, if the survivor applies for equity release, the presence of a Form A restriction on the title (indicating shared ownership) may deter lenders. Without clear evidence of sole ownership, providers may be unwilling to lend.

Overcoming the Obstacles

To avoid complications, clients should:

• Discuss potential future needs for equity release before severing a tenancy.
• Consider re-joining tenancy from tenants in common to joint tenants if equity release may be required later.
• Complete Land Registry forms RX3 and ST5 to remove restrictions and simplify ownership structures.
• Seek assistance from regulated professionals, as changing the Land Register is a reserved legal activity under the Legal Services Act.

Key Takeaways

• Owning property as tenants in common can limit access to equity release options due to ownership restrictions.
• Future financial planning should include discussions about equity release to avoid unexpected hurdles.
• Professional guidance is recommended for modifying ownership structures to meet specific needs.

For anyone considering these arrangements, consulting a legal or financial advisor can ensure plans align with both immediate and long-term goals.

With thanks to the IPW technical updates