An Inheritance tax specialist recently explained that inheritance tax can significantly reduce the amount of wealth that an individual may be able to pass on to their heirs.
However, equity release could be a strategy for reducing the impact of this tax on their estate. By borrowing against the value of the property, capital can be accessed to reduce the size of the estate. As long as that capital is used up to support your objectives or family members during your retirement.
The Basics
There are two main types of equity release: lifetime mortgages and home reversion plans. Lifetime mortgages allow you to borrow money secured against the value of your home while retaining 100% ownership of the property. Home reversion plans involve selling a share or all of your home to a provider, in exchange for a lump sum or regular payments. To find out more about equity release from our CEO Mark Gregory please visit our dedicated page: what is equity release?
How Could Equity Release Reduce Inheritance Tax?
As confirmed by an Inheritance tax specialist, one of the key benefits of equity release for IHT planning is that it can help to reduce the size of your estate. By borrowing against the value of your home, you can access funds that can be used to pay for everyday living expenses, holidays, and care costs, or by transferring wealth and making gifts to your heirs. This can help to reduce the value of your estate, which in turn can reduce the amount of IHT that will be due when you die.
As confirmed by a pension specialist, equity release can also be a tax-efficient way to access funds, similar to a typical pension provision. Unlike other types of borrowing, the interest on an equity release loan is rolled up and added to the loan amount, meaning that you do not have to make any repayments during your lifetime. All lifetime mortgages now come with voluntary repayment options too and with over several hundred different product features available there can be a solution available to suit most individual circumstances. That’s why we built smartER™, so you can browse and compare all the different features for yourself from the comfort of your own home.
Time to give your income a boost?
One financial adviser explained that the balance between pensions and property has shifted significantly over the last decade when it comes to supporting later life financial planning. A combination or low savings interest rates, a reduction in final salary pensions, longer life expectancy, and the rapid increase in house values has left a lot of people asset rich but short on cash to support retirement activities and care provision in later life. This is where equity release and our specialists here at Equity Release Supermarket are playing an increasingly vital role, helping people to stay in their family homes for the duration of their lifetime. Checking how much you could release is really simple using our lump-sum calculator.
Focus on what matters… and be there to enjoy it..
While homeowners have benefited from rising house values, the opposite could be said for first-time buyers. Older relatives are starting to pass down wealth to the younger generation at a time when they most need capital, enabling family members to get on the property market ladder earlier.
At Equity Release Supermarket gifting accounts for more than 12% of total funds released, and it is increasing. Feedback from our clients tells us that gifting to loved ones is the most rewarding experience associated with releasing equity. Being around to experience a first car, a first home, or even helping to support new arrivals to the family, is something that stays with our clients for the rest of their lives and is an immensely rewarding experience.
Case Study – Gifting to loved ones
Miss McGuire is 30 years old and is looking to buy her first home at £500,000. As well as paying rent for a few years, she has managed to save up £25,000, and her mortgage adviser has confirmed that this would be enough for a 5% deposit. She has a good job and feels she can comfortably afford to pay around £2,000 per month for a mortgage.
Her mortgage adviser agreed with her that if she secures a fixed rate for the next five years this would provide her with stability. The problem is within the current market, her mortgage adviser explained that five-year fixed rates for a 95% mortgage are currently around 5.1%, meaning she’ll pay about £2,400 per month if she spreads the mortgage term over 35 years, on a capital and interest basis. Miss McGuire said that the payment is a bit more than she’s comfortable with, but if it was the best option she would be able to make the payment though it would stretch her finances.
Miss McGuire discussed her pending mortgage offer to her parents, who suggested their parents, Miss McGuire’s grandparents had said that they would be very keen to help their granddaughter, but they don’t have any spare income, they have enough cash savings for their own use, but no other savings to spare.
However, they have their house and it’s worth £1.5 million, and they suggested that they would be delighted to gift their granddaughter £100,000 at a time when she most needs the inheritance that they had planned to provide for her.
Using a flexible lifetime mortgage, they could easily raise a gift of £100,000 for their granddaughter, and Miss McGuire can now increase her deposit to 15%. Her mortgage adviser confirmed that they could now secure borrowing at 4.3% for the same 5-year mortgage, and her monthly payments have been reduced to £1,958, which was below her initial budget, and a feature of the flexible lifetime mortgage is that it allows flexible ad hoc payments to service the interest if the family choose to do so.
Furthermore, the grandparents could set up a cash reserve facility and draw down further funds, to help other younger siblings in the future, or have the capital for their own benefit should the need arise.
Replacing an existing mortgage – making things simpler.
With interest rates on the rise, many mortgage holders are shocked to see their payments rise significantly when their current rate ends. Equity release can be used to replace the existing mortgage to help keep payments under control. In fact, over 25% of our clients use equity release to replace their existing mortgage, with some choosing to live payment free, and let the loan increase. This helps some to ensure that a higher proportion of the income they receive can be spent on enjoying the retirement they deserve.
What type of things should I consider?
There are a few things to consider when thinking about equity release.
As we have highlighted the value of your estate will decrease, and although this could have tax benefits, it will reduce the overall value of what you pass down to your heirs. However, it is also a possibility to include an inheritance protection guarantee such as that included in the Legal and General Premier Flexible Opal Plan.
We have also discussed that there are lots of plans on the market to choose from with many different features, benefits, and fixed interest rates, so this is why it’s important to engage with a whole of market adviser who doesn’t have any specific ties to certain lenders. After all, releasing equity is a big decision so we wouldn’t recommend limiting yourself to just a ‘one-size fits all’ approach.
In addition, equity release may not be suitable for everyone. It is important to consider your individual circumstances and to seek professional equity release advice before making any decisions. Our expert equity release advisers can help you to understand the potential risks and benefits of equity release and can help you to choose the most appropriate product for your needs.
At Equity Release Supermarket we aim to give you all the tools and information to help you make the right decision for you and your loved ones. We are the only specialist firm that allows you to search the entire market based on your personal circumstances using smartER™, without having to commit to any appointments or take any sales calls. We also have a range of accurate calculators and information for you to use and research at your own time, and at your own pace.
And when you are ready you can speak to one of our award-winning team on 0800 088 5924 or you can find your local adviser that serves your area. We are happy to help with any questions you have.
It is important to understand the features, benefits and risks that should be taken into account before making any long-term financial decisions and raising capital from the equity in your home.
