How does equity release affect inheritance? | moneyfacts.co.uk

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Derin Clark

Derin Clark

Online Reporter
Published: 02/09/2021

Equity release can be a good way for older homeowners to tap into the wealth they have built up within their homes, but many considering this option will have concerns on how it will impact the inheritance they leave behind. To help homeowners get a clearer understanding of the impact of equity release on what they leave behind, here we look at how equity release affects inheritance.

The biggest impact equity release has on inheritance is that it will reduce the amount inherited by loved ones when the property is sold after the equity release borrower has gone into permanent care or died. Not only does the sale of the property need to cover the amount of equity release taken out, usually between 20 to 60% of the property’s equity, but also repay the interest that has accrued on the equity release loan. As soon as money is taken out through equity release interest starts to be added, this means that someone who takes equity release at 55 will likely leave behind a smaller inheritance than someone who waits until later in life to take equity release.

Saying this, rising house prices can help to mitigate some of the impact the equity release loan and interest has on the inheritance left behind. As well as this, many equity release plans now allow borrowers to make partial repayments or interest repayments during their lifetime, which again can reduce the impact on inheritance. Another factor to consider is that it is common for equity release plans to now allow drawdown, which means that borrowers can take out lump sums of money as and when they require, with interest only being added once the money is taken (or drawn down).

Furthermore, a no negative equity guarantee clause, guarantees that no more than the outstanding value of the home will have to be used to pay the equity release debt, which means that inheritors will not be left with additional equity release debt once the property is sold.

Impact of equity release on inheritance tax

Another important factor to consider when it comes to equity release and inheritance is the impact it can have on inheritance tax. Currently when someone dies their inheritors will often have to pay an inheritance tax of 40% on assets and wealth above £325,000. The money used from the property to repay the equity release loan is deducted from the inheritance so is not liable for inheritance tax.

As well as this, if the borrower uses money borrowed via equity release to gift to their children or grandchildren, for example to be used towards a house deposit, after seven years they will not have to pay inheritance tax on the money. If the borrower dies before seven years, inheritance tax will need to be paid, but the amount depends on how long ago the money was gifted.

Getting expert advice

Clearly, equity release can have a significant impact on inheritance and, as a result, before taking out equity release borrowers should have a conversation with family members to discuss their options. As well as this, borrowers should get advice from an independent financial adviser to discuss the impact equity release will have on the inheritance they will leave behind and whether there are alternative options that would better suit their circumstances.

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