If you are considering equity release as a long-term financial vehicle to unlock the cash tied up in your property, you will probably already have plans on how to use the funds.
Whether you take out a lifetime mortgage , equity release enables you to free up some of the value tied up in your home and release it back to you as cash, either as a lump sum or as several cash payments.
You can use the money for whatever you wish – to boost your retirement income, carry out home improvements, go on a once-in-a-lifetime holiday, help your children get onto the property ladder, pay school fees for the grandchildren… the list is endless.
When you die, your home will typically be sold by the executors of your estate, and some of the proceeds will be used to pay back the equity release plan.
Lifetime mortgages are the most popular form of equity release and they will have to be paid off upon death – either via the sale of the property or with other available funds. Your net estate will then be distributed to the beneficiaries named in your Will. If the beneficiaries choose to keep the property as an investment, they could pay back the lender with a buy-to-let mortgage.
Taking out an equity release plan may lower the amount of your inheritance, and many people are concerned that there may not be a lot left to leave to your beneficiaries. One way to protect some of the value of your home to make sure that your family will definitely inherit a portion of it is to obtain a protected equity guarantee, also known as an inheritance protection guarantee.
Building this option into your lifetime mortgage allows you to ringfence a percentage of the property’s value. However, do bear in mind that the larger the amount is that you wish to protect, the lower the amount that you can release from your home. In other words, if you choose to protect 20%, the maximum amount you can obtain under an equity release plan will also be 20% lower.
When you release equity from your property, you reduce the value of your estate. This will most likely reduce the amount of inheritance tax payable on your death. In some cases, this could take the value of the estate below the IHT threshold of £325,000.
You should also bear in mind that your main residence has an additional IHT allowance, currently £175,000 per person, that can be added to the £325,000 nil band. This means that a couple can potentially leave a family home worth up to £1 million before any IHT becomes payable.
That said, the extra nil band does not apply to the equity released from the home if you have not actually spent the money. In that case, it would remain part of your estate and might become subject to IHT in due course.
Subject to careful planning, you can gift some or all of the equity release funds as a Potentially Exempt Transfer. If you live for more than 7 years after making the gift, the money will be IHT exempt. However, if you pass away within 7 years, the amount will be counted as part of your estate and will be subject to IHT.
If you gift money from equity release and you pass away within 3 years, the gift will be charged at the full 40% IHT tax rate. If you die within 3-7 years of the gift being made, a sliding scale ‘taper relief’ will be applied, meaning the more time passes between the date of the gift and the date of death, the less tax will be payable.
If you are thinking about taking out an equity release plan and are worried about the impact on your future inheritance, the most sensible thing to do is to speak to an equity release specialist. Give me a call on 01903 890660 or contact me here so I can answer any questions you may have and help you choose the most suitable equity release plan for your personal circumstances.