EQUITY RELEASE PRODUCT (Hansard, 15 July 1991)

§ Mr. Steve Norris (Epping Forest)
I beg to move, That the clause be read a Second time.
The new clause addresses a serious problem facing many elderly people. I start by declaring an interest as a director of Haven Services Ltd, a company which manages sheltered housing for more than 4,000 elderly people and their families. The company is 49.9 per cent. owned by Commercial Union, which has provided me with the technical information in this brief.
We live in an aging society. The number of people who were over 75 in 1985 was 3.8 million. In five years' time, there will be 4.2 million over 75, and when we are a short way into the next millennium, this will have risen to nearly 5 million.
Many of those elderly people will rely upon the state for their welfare. Some of the more prudent will have tried to provide for themselves in retirement, but they will have seen their savings eroded by the passage of time or by inflation to a point where their entire upkeep will have been thrown on to the state. There are some who do not have families on which they can rely, and there are some families that are not in a position to provide for their older relatives.
An OECD conference three years ago identified three principal ways of funding the rising costs of aging populations. First, it suggested that state benefits could become larger. Secondly, it was suggested that we could keep people at work longer. Thirdly, it was suggested that we could encourage elderly people to provide better for themselves, and the new clause is designed to provide that encouragement. It would ensure that a way was opened to enable an elderly person's own resources to be used better to provide cash for living.
As pressure on public funds grows, every effort must be made to allow those who could help themselves to do so. That in turn will allow public funds to be used to help those who have no other resources and more immediate needs. The Government recognise that need through the National Health Service and Community Care Act 1990, which envisages more private funding of care and the greater provision of care in the home.
We all know how much old people would prefer to stay in their own home. That was made clear in the Griffiths report of 1988, which led to legislation in 1989. Many elderly homeowners sadly become frail or lose their mobility, but they could stay in their own home if nursing and other relevant care were available to them. All too 136 often, tragically, they cannot afford that care and they lose their independence far more quickly than they need. The tragedy is that when the need is at its greatest, the wherewithal to meet the need is not available in ready cash. The huge irony is that many elderly people own their own houses. Currently 46 per cent. of retired people are in that position, and the percentage is increasing. Incidentally, most of the properties of these people are owned outright.
The house that is owned by an elderly person may represent a sizeable capital asset. It makes eminent sense to use its value while still allowing the elderly person to live in it. That encourages self-reliance, and it is consistent with the Government's policy to encourage privately funded age care. In present circumstances, however, these people—classically asset rich but cash poor—are compelled to sell up and part with their chief asset, losing along the way the increasing value of their property, of course, or they are forced to become a drain on their family or on the state.
There are options already. There are mortgages that are linked to annuities or investment bonds. There are home reversion schemes where the house is sold and the occupant continues as a tenant. There are roll-up loans, where a mortgage has its interest rolled up until death. All these are known broadly as equity release schemes, but each of them currently suffers considerable disadvantages.
As the Building Societies Association said in 1988, the low take-up of the schemes, in spite of the keen interest in them, was due to the limitations of the mechanisms rather than a lack of underlying demand. More seriously, recently two companies were expelled from FIMBRA for effectively promoting unworkable schemes. There are instances, sadly, of participants ending up paying out more money than the scheme delivers back to them.
With a minor change to the tax rules—this is the subject of the new clause—an equity release scheme that would be truly valuable could be available. In essence, the scheme would work as follows. An elderly householder would promise an insurance company that after his death a sum agreed between the two would be paid to the insurance company. The promise could be secured on the house or on other assets. In return, the insurance company would pay a regular and increasing amount to the participant. Companies operating such schemes would fund the payments from the pool of funds reverting to the company after the deaths of the participants. The key is that no borrowing is involved, hence there would be no interest payments to participants. Such schemes are immune to interest rate fluctuations and are therefore dependable and effective as a source of income.
If such schemes are to work, current tax rules need alteration. The new clause widens their scope to make it entirely clear that a participant would receive no interest element in his equity release income. The income is, in effect, an advance repayment of his own capital—that is, part of his estate. Technically, the participant will use part of the value of the house to buy a monthly sum until he dies, which amounts, in effect, to an annuity.
Such a scheme is therefore governed by the tax rules on annuities and the new clause would modify the relevant section—section 656—of the Taxes Act 1988. The payments received by the participant are in two parts—first, capital because it returns to him his purchase price over time and, secondly, income representing interest on the capital before it is paid back to him.
137 If the new clause were accepted, it would allow for schemes that would give participants predictable payments for their lifetime.

§ Mr. Charles Wardle (Bexhill and Battle)
Is my hon. Friend aware that his proposal would be especially attractive to people who retired before 1978 and the introduction of the state earnings-related pension scheme? As he will know, in Bexhill in my constituency 46 per cent. of the population is 65 years of age or over. Many people retired before 1978 and the average statistic of an uplift in income over the past decade of 23 per cent. above the rate of inflation does not apply to them because they do not have additional earnings over and above their basic state old-age pension. My hon. Friend's scheme is especially attractive to people who wish to stay in their houses but do not have that additional income.

§ Mr. Norris
My hon. Friend is entirely right. He recognises the desperately sad phenomenon in his constituency of people who are asset rich and cash poor, who are keen to stay in their homes and who could have the wherewithal to do so if the Government were minded to consider the new clause with favour.
If the new clause were accepted, it would allow for schemes that would give participants predictable payments for their lifetime, which would increase at a rate expected to exceed inflation. Participants would retain full ownership of their assets and not be at risk of losing them. They would also benefit from the rising value of their house during their life.
When the present law was drafted, no one had contemplated such a scheme. Its wording enables the Inland Revenue to interpret part of the payment received by the participant as coming from interest and thus be subject to tax. I submit that no interest is involved and, subsidiarily, that such a tax liability would make the scheme decidedly unattractive and, in effect, unworkable.

§ Mr. Rupert Allason (Torbay)
Will my hon. Friend be kind enough to explain what would happen if the new clause were accepted and if a person in either sheltered accommodation or in his own property—which is what the new clause would provide—had to go into residential accommodation and had to sell his property?

§ Mr. Norris
I hope that my hon. Friend will forgive me, because I can give him only what should be a long answer. In brief, however, what happens in general is that, sadly, the entire value of the asset is consumed by local authority charges in a relatively short time. One of the ironies is thus that, in the end, the public purse must contribute far more towards the eventual upkeep of the elderly person than if the insurance company funded what remained of his life out of the pool of participants' income. If insurance companies were able to offer such a tax-efficient scheme, my hon. Friend's constituent in sheltered housing would be infinitely better off as would the local authority which would otherwise have to fund the person.
The Economic Secretary and the Financial Secretary were extremely helpful to me when I discussed the outline of the proposal with them. The Exchequer would not lose revenue if the new clause were accepted. It involves a zero interest annuity, no income is involved and only capital is paid out. As I said to my hon. Friend the Member for Torbay (Mr. Allason), there is a potential for substantial 138 public sector saving of community care costs, and the proposition is also in line with Government policy on encouraging independence. It is especially appropriate in dealing with the elderly who can manage in their own homes and whom we clearly want to encourage to do so.
On that basis, I invite the Minister to consider the advantages of extending the relief as I have outlined.

§ Mr. Maples
My hon. Friend's proposal is extremely interesting. I have considerable sympathy for the idea of enabling elderly people to release equity from their homes so that they are not, to use my hon. Friend's phrase, asset rich and cash poor. However, his amendment would create considerable possibilities for tax avoidance. I will not go into detail, but my hon. Friend is aware of them because we have discussed them.
It would be necessary to include in any such provision safeguards against such practices. I am, therefore, unable to accept my hon. Friend's new clause, but we will examine his proposal further, without commitment, to ascertain whether there might be worth while public expenditure savings if the proposed new annuity became available. I will ask the Inland Revenue to discuss the possibilities with bodies representing the insurance industry.

Mr. Morris
I take my hon. Friend's point concerning tax avoidance. I have no desire to see the scheme used as an avoidance device, but I believe that a mechanism could be devised to prevent that from happening, which would cap the amount made available under such a scheme.
I am grateful to my hon. Friend the Economic Secretary for his otherwise constructive acceptance of my general proposition. The concept of allowing people to release the large amount of equity that they have stored up for their own benefit, to provide for themselves in their old age, is an important one. In view of my hon. Friend's assurance, I beg to ask leave to withdraw the motion.