Reverse mortgages hit estate tax snag

Strong demand is seen for the mainland's 'home for pensions' scheme, but the loans are likely to slash the take from any inheritance tax

PUBLISHED : Thursday, 03 October, 2013, 12:00am
UPDATED : Thursday, 03 October, 2013, 2:49am

Beijing's controversial inheritance tax plans could be complicated by its own efforts to promote reverse mortgages to help fund old-age pension provision.

Property worth 130 billion yuan (HK$164 billion) could be reverse-mortgaged, according to an estimate by Essence Securities, effectively removing a raft of properties from the grasp of tax authorities currently working on the inheritance issue.

The State Council, the country's cabinet, has backed both initiatives.

A pilot homes-for-pensions programme to be launched in the first quarter of next year was approved last month, following on from February's urging of local officials to explore the levying of an inheritance tax at an "appropriate time".

Analysts say the market potential for the reverse mortgage business is huge and officials from the Ministry of Civil Affairs, the China Insurance Regulatory Commission and related authorities met at the end of September to discuss details of the scheme.

Reverse mortgages typically allow homeowners to secure capital income by using their home as collateral for a real estate-backed loan, the terms of which allow residents to live in their properties until death, or the expiration of the mortgage.

Permitting reverse mortgages effectively removes from the net the key taxable asset for many families.

And with many homes likely to be worth more than the 800,000 yuan that is currently the proposed starting point for the inheritance tax, reverse mortgages could take a huge slice out of the 200 billion yuan that mainland media have estimated could be raised by the tax.

The tax has huge appeal for a government trying to tackle the gap between rich and poor that has widened dramatically in recent years after three decades of breakneck economic growth on the mainland.

The measure could help fund social spending as well as subsidise local government spending that is set to be crimped by dealing with a debt pile that may now top 20 trillion yuan, according to new calculations by Liu Yuhui, a researcher at the elite Chinese Academy of Social Sciences.

As many as 70 per cent of elderly respondents to a new mainland poll said the proposed 800,000 yuan starting point for the inheritance tax was too low and should be raised to 10 million yuan.

Some 95 per cent of those polled by China Will Bank, a charitable organisation, had sought advice on the value of their homes.

That signals huge pent-up demand for a reverse mortgage scheme currently in the early stages of development.

Citic Bank began offering reverse mortgage products in 2011.

They cap the mortgage life at 10 years and provide monthly payments of no more than 50,000 yuan.

Citic is one of a handful of banks offering the products on the mainland.

Wang Guojun, an insurance professor at the University of International Business and Economics, said one problem holding back reverse mortgage development is the 70-year leasehold on property that makes valuations hard to calculate.

Banks also bear the risk of drops in property prices.

The lack of substantial participation from the insurance industry so far has also been a drawback.

"Insurance companies will be cautious in approving reverse mortgages as it's still in its infancy and the risks are difficult to assess, in particular the possibility of a rise in insurers' bad loans," Chen Xingyu, an analyst with Phillip Securities, said.