More pensioners are likely to consider releasing equity from their properties to pay their bills if Labour goes ahead with a mooted mansion tax, experts have predicted.
Chancellor Rachel Reeves is reportedly considering hitting homeowners in properties worth over £2m with a 1 per cent annual charge in her November Budget.
Although only a small fraction of homes in the UK are worth over £2m, they are more common in certain areas, such as central London, with Savills analysis suggesting over 15 per cent of homes in some areas of the capital would be affected.
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Financial advisors say some of their clients who live in these homes are pensioners who have low incomes but bought the properties decades ago when they were far cheaper.
And they said they may struggle to pay their bills if they did face a tax.
Under the plans, a property worth £2.5m would attract a £5,000 charge each year.
Mortgage advisors and financial advisors say pensioners living in these types of homes may turn to equity release mortgages, which allow access to money tied up in a home as a tax-free lump sum or regular payments.
Eamonn Prendergast, chartered financial adviser at London-based Palantir Financial Planning Ltd said: “A mansion tax could push asset-rich, cash-poor pensioners to release equity just to pay the bill.
“I’m already hearing concern from older homeowners who live in valuable homes but have modest incomes. If a levy on properties over £2m is introduced, some may feel forced to tap into equity release to cover the cost.
“While it can provide liquidity, it’s not without consequences. Rates are higher than standard mortgages and compound quickly over time.
“Tax policy shouldn’t penalise people for simply staying in the house they’ve lived in for decades.”
Once an equity release mortgage is taken out, the loan or payment is repaid, along with accrued interest, when the property is sold, usually after the homeowner dies or moves into long-term care.
Ross Lacey, director at Fairview Financial Management, said it was “certainly a possibility” that more homeowners in expensive homes would consider equity release.
He said many could also consider downsizing as an alternative.
Jane King, an equity release advisor, said that it was option for pensioners, but it could be costly.
“You could certainly raise funds [to pay a tax bill] via equity release, however, with the interest rolling up it’s an expensive option,” she said.
Equity release mortgages can be expensive because the interest is generally higher than with standard mortgages.
King said many owners of high-value properties “had found themselves in this position by accident rather than design”.
“There are many flats in London and other desirable cities where the value is in excess of £2m so they are not all mansions,” she said.
The so-called mansion tax is one of multiple tax ideas for property reportedly under consideration for the Budget.
One suggested way to extract more from richer households would be to start imposing capital gains tax on the sale of expensive homes.
Currently, if you sell your main residence for a profit you do not have to pay any tax on that profit. However, the Chancellor is reported to be considering removing that exemption for higher-value properties.
