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How does equity release affect your inheritance?

08/03/2022 |  min read

Leaving an inheritance to loved ones can be a priority or a pressure in your later years. Working out how much you might be able to pass on, as well as when you might do so, is likely to be a consideration throughout your financial planning for and in retirement.

If you are planning on releasing equity at some point during this time, it’s important that you factor in how the inheritance you plan to leave may be affected.

You may either be planning to leave an inheritance from your estate to loved ones when you pass away, or you may be looking to gift an early inheritance now so that you can watch those closest to you utilise the funds you give them within your own lifetime. In both circumstances, taking out an equity release product will have an impact on the amount of inheritance you are able to leave or give in the future, and might have an effect on any Inheritance Tax that you may be liable to pay, so it's important to make an informed choice.

Equity release explained.

The UK’s most popular equity release product, a Lifetime Mortgage, allows homeowners aged 55 and over to release a tax-free cash lump sum from the value of their home. The released funds could be used as a gift to loved ones, as well as for many other reasons such as clearing an existing mortgage and home improvements.

What happens to an equity release plan when you die?

There are no required repayments with a Lifetime Mortgage, although you can usually make some if you wish. Instead, interest accrues, and the amount borrowed plus this interest is only due for repayment when the last homeowner passes away of moves into long-term care.

At this point, your home would likely be sold by the executors of your estate and your Lifetime Mortgage would then be paid back with the proceeds of the sale.

Therefore, by taking from the value of your home now, there will naturally be less available for your estate in the future as a possible inheritance. However, as you could also use the cash you release now to fast-forward the inheritance you give, balancing future and current needs when assessing your options is essential.

You should also bear in mind that any entitlement to means-tested benefits you may have could also be affected.

If you wish to learn more about what happens to an equity release plan when you die, click here

Equity release and Inheritance Tax.

One of the most important considerations you should make when assessing how equity release fits in with the inheritance you plan to leave is the implications it may have on your Inheritance Tax liability.

Who pays Inheritance Tax?

Inheritance Tax is a tax on your estate that loved ones could be liable for when you pass away. The amount payable depends on the value of your estate and, in some circumstances, there could be nothing to pay at all. These include:

  • If the value of your estate is below £325,000.
  • If you leave everything above £325,000 to your spouse, civil partner, or a charity or community amateur sports club.

How does releasing equity affect Inheritance Tax?

Although the value of your estate and possible inheritance will be reduced when you release equity, the amount of Inheritance Tax that your loved ones might have to pay upon your death could also be reduced.

Gifting an early inheritance with your tax-free cash can also alter the Inheritance Tax payable. If you live for more than 7 years after making a gift, the gift will be classed as a Potentially Exempt Transfer and exempt from Inheritance Tax.

However, if you do pass away within 7 years, the funds might be deemed part of your estate and therefore be included when Inheritance Tax is calculated.

There are other factors that will affect how much Inheritance Tax your loved ones could be liable for if you release equity, and these are best explained by a fully qualified adviser. Bear in mind that the Financial Conduct Authority do not regulate Inheritance Tax planning.

Call us on 0800 048 5384 today to arrange your free and no-obligation advice appointment. Your adviser will help you decide if a Lifetime Mortgage is right for you and your family and, should you choose to proceed, recommend plans to suit your individual needs, whether they revolve around giving an early inheritance or Inheritance Tax planning.

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