Equity Release and Inheritance Tax

Equity release allows homeowners aged 55 and over to access the equity tied up in their property. While it can provide financial flexibility, it’s essential to understand how it interacts with Inheritance Tax (IHT). This article examines the key considerations and implications.

Understanding Equity Release

Equity release products, such as lifetime mortgages and home reversion plans, enable homeowners to access a lump sum or regular income from their property without having to move.

Lifetime Mortgages

  • A loan secured against your property.
  • Interest accrues and is typically rolled up, meaning you don’t make regular repayments.
  • The loan and accrued interest are repaid from the sale of the property when you die or move into long-term care.

Home Reversion Plans

  • You sell a portion or all of your property to a provider in exchange for a lump sum or regular income.
  • You retain the right to live in the property rent-free for life.
  • The provider owns the agreed portion of the property’s future value.

How Equity Release Affects Inheritance Tax

Equity release directly impacts the value of your estate, which is a crucial factor in determining IHT liability.

Reduced Estate Value

  • By releasing equity, you reduce the value of your property, which is a significant asset in most estates.
  • This reduction can lower your overall estate value, potentially bringing it below the IHT threshold or reducing the amount of IHT payable.
  • With a lifetime mortgage, the outstanding loan and accrued interest are deducted from the property’s value when calculating your estate.
  • With a home reversion plan, the portion of the property sold to the provider is no longer part of your estate.

Impact on Nil Rate Bands

  • The standard Nil Rate Band (NRB) is £325,000.
  • The Residence Nil Rate Band (RNRB) is £175,000, subject to specific conditions.
  • Equity release can help ensure your estate remains within these thresholds, maximizing the benefits of the NRB and RNRB.
  • If your estate’s value is significantly reduced, you may not fully utilize the RNRB, especially if it is tapered due to a high value estate before equity release.

Interest Rollover and IHT

  • With lifetime mortgages, interest rolls up, increasing the total loan amount over time.
  • This increasing debt further reduces the value of your estate, which can be beneficial for IHT purposes.
  • However, it also reduces the amount of inheritance your beneficiaries receive.

Planning Considerations

When considering equity release, it’s essential to factor in its impact on IHT and plan accordingly.

Estate Planning

  • Review your estate planning strategy to ensure it aligns with your equity release plans.
  • Consider how equity release will affect the distribution of your assets among beneficiaries.
  • Update your will to reflect any changes in your estate’s value and your wishes.

Gifting

  • Equity release can provide funds for gifting to beneficiaries during your lifetime.
  • Gifts made seven years before death are generally exempt from IHT.
  • Gifting can further reduce your estate’s value and IHT liability.

Professional Advice

  • Seek advice from a financial advisor specializing in equity release and IHT.
  • A solicitor can ensure your estate planning documents are up-to-date and legally sound.
  • An accountant can help you understand the tax implications of equity release and gifting.

Lifetime Mortgage considerations

  • Understand the effect of compound interest, and how quickly the debt can grow.
  • Consider how much equity you really need to release.
  • Be aware of any early repayment charges.

Home Reversion considerations

  • Understand that you are giving up future potential growth on the portion of the house you sell.
  • Ensure you understand any conditions in the contract.

Practical Steps

  1. Assess Your Estate: Determine the current value of your estate and potential IHT liability.
  2. Evaluate Equity Release Options: Compare lifetime mortgages and home reversion plans to find the best fit.
  3. Calculate Impact on Estate: Estimate how equity release will affect your estate’s value and IHT liability.
  4. Update Your Will: Ensure your will reflects your equity release decisions and asset distribution.
  5. Seek Professional Advice: Consult with financial, legal, and tax professionals.
  6. Inform Beneficiaries: Communicate your equity release plans to your beneficiaries to avoid surprises.
  7. Regular Reviews: Review your estate plan and equity release arrangements periodically.

Key Considerations and Tips

Transparency

  • Be transparent with your beneficiaries about your equity release plans.
  • Open communication can prevent misunderstandings and disputes.

Flexibility

  • Choose equity release products that offer flexibility and meet your changing needs.

Long-Term Planning

  • Consider the long-term implications of equity release on your estate and beneficiaries.

By understanding the interplay between equity release and IHT, homeowners can make informed decisions that benefit both their current financial needs and their estate planning goals.

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