An equity release scheme can be an attractive option for homeowners aged 55 and over. It enables you to access the equity tied up in your home as a lump sum, regular payments or a combination of both.
Whether you want to improve your standard of living, carry out home improvements or help your children purchase their first property, equity release can provide greater financial flexibility.
However, there are a number of important factors to consider before deciding whether it is the right solution for you. One common question is: does equity release affect Inheritance Tax?
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax charged on your estate when you die. Your estate includes your property, possessions and money.
If your estate is worth less than £325,000, there is normally no Inheritance Tax to pay. The same applies if everything above this threshold is left to your spouse, civil partner, a charity or a community amateur sports club.
The threshold can increase to £500,000 if you leave your home to your children or grandchildren. This also applies to adopted children, foster children and stepchildren.
The relationship between equity release and Inheritance Tax
If you release equity in order to gift money to another person, the gift may be exempt from Inheritance Tax provided you survive for seven years after making it and receive no direct or indirect benefit in return.
If you die within seven years of making the gift, its value may be taken into account when calculating the Inheritance Tax payable on your estate.
If you gift more than £325,000 to a non-exempt beneficiary and die between three and seven years later, taper relief may reduce the amount of tax payable on the gift.
Seek Inheritance Tax advice before taking out equity release
Before proceeding with an equity release plan, it is important to seek professional advice regarding Inheritance Tax planning.
Everyone’s financial circumstances are different, so speaking to an experienced financial adviser can help you understand how equity release could affect your estate and your beneficiaries.
Although taking out an equity release mortgage may reduce the value of your estate and, in some cases, lower a potential Inheritance Tax liability, it should never be undertaken solely as a way of reducing tax.
If you are considering equity release, a useful starting point is to use our Equity Release Calculator to estimate how much you could release and whether it is likely to be the right financial solution for your circumstances.