Navigating the complexities of equity release can be daunting, especially when considering its impact on your family's inheritance. 

With over 7,000 individuals embracing equity release in the third quarter of 2023, its popularity as a lending choice is evident.¹ 

However, understanding its potential effects on your family's financial future is essential.

We are here to guide you through this crucial topic with expertise and clarity.

This article, crafted by our team of financial experts, delves into the intricate relationship between releasing equity and inheritance in the UK.

We are here to provide you with accurate, up-to-date information, ensuring you make informed decisions about your financial future.

How Does Equity Release Affect Inheritance?

Releasing equity from your home can significantly influence the inheritance you leave behind. 

It is essential to understand how these schemes work and their potential long-term effects on your estate's value.

The Effect of Equity Release on the Value of Your Estate

Releasing equity, through either a lifetime mortgage or a home reversion plan, directly affects the value of your estate and the inheritance you leave. 

With a lifetime mortgage, you borrow against your home, and the loan plus interest is repaid from your estate, potentially reducing your beneficiaries' inheritance. 

In a home reversion plan, selling a part of your home means a smaller estate value, as the proceeds from the eventual property sale are shared with the plan provider based on the ownership split.

Both options, while beneficial for immediate financial needs, can significantly reduce the legacy you pass on to your heirs.

Gifting Money to Family with Equity Release

Many homeowners opt to unlock the value of their homes to provide financial support to their family members while they are still alive. 

This approach can be particularly helpful for assisting children or grandchildren with significant expenses such as purchasing a home, funding education, or starting a business. 

Additionally, this strategy can play a role in managing inheritance tax liabilities, a point we will delve into later.

However, this method of financial gifting does have implications for the inheritance you will eventually leave. By allocating a portion of your property's value to your family, you are effectively reducing the overall worth of your estate. 

Moreover, the interest accruing on the amount given as a gift adds to the total debt against your property. 

Therefore, it is crucial to weigh the benefits and drawbacks of this approach and to consult with a financial advisor to ensure that this decision aligns with your long-term financial goals.

The Effect of Equity Release on Inheritance Tax

The intersection of releasing home equity and inheritance tax is complex and warrants careful consideration.

Can Equity Release Reduce Inheritance Tax?

Equity release can influence your inheritance tax liability in a couple of ways. 

Firstly, reducing the overall value of your estate might bring the estate's worth below the inheritance tax threshold, potentially easing the tax burden on your heirs. 

For instance, if your estate is valued at £400,000 and you opt for a lifetime mortgage of £100,000, the estate value drops to £300,000, possibly falling under the tax threshold.²

Additionally

If you use the released funds, such as the £100,000 in our example, for gifting to your children or grandchildren, these gifts could be exempt from inheritance tax, provided you survive for seven years after making them. 

However, if these gifts are made to friends or other relatives, they would be subject to inheritance tax if you pass away within seven years of the gift.

Therefore, the impact of equity release on inheritance tax varies based on your specific circumstances and how you utilise the released funds. 

It is crucial to seek professional advice to fully understand the tax implications and to make informed decisions that align with your financial planning goals.

How Do Lifetime Mortgages Affect Inheritance Tax?

Lifetime mortgages, where you borrow against your home while retaining ownership, can affect inheritance tax calculations. 

The loan amount, along with the interest, is deducted from the estate's value before tax is calculated. 

This could result in a lower inheritance tax but also means less inheritance overall.

How Do Home Reversion Plans Affect Inheritance Tax?

In a home reversion plan, where you sell a part or all of your home, the sold portion is no longer considered part of your estate for tax purposes. 

This can reduce the value of your estate for inheritance tax calculations, potentially lowering the tax payable but also reducing the inheritance.

Using Inheritance Protection with Equity Release 

Inheritance protection is a feature offered on some plans that can help safeguard a portion of your estate for your heirs.

How Does Inheritance Protection Work to Protect Your Family’s Inheritance?

Inheritance protection allows you to safeguard a specific portion of your property's value for your heirs, ensuring that this amount is excluded from the loan and preserved for your family's inheritance. 

When you choose this option, you commit to protecting a fixed percentage of your home's value, which can mean a reduced borrowing amount from the plan. 

Despite this, the benefit lies in the assurance that, regardless of the total debt accumulated on the property, this protected portion will be passed on to your beneficiaries. 

This feature strikes a balance between accessing your home's equity during your lifetime and maintaining a guaranteed legacy for your family, making it a crucial consideration in estate planning.

How Does Inheritance Protection Affect Inheritance Tax?

Incorporating inheritance protection into your equity release plan can positively impact inheritance tax. 

This feature guarantees that a specified portion of your property's value is safeguarded, potentially lowering your estate's taxable value. 

Consequently, this not only helps in potentially reducing the inheritance tax burden but also ensures that your beneficiaries are guaranteed to inherit a defined portion of your property's value, securing a part of their inheritance.

Common Questions

Conclusion

In conclusion, navigating the complexities of equity release demands a thorough understanding of its effects on both your estate and potential inheritance tax implications. 

By exploring options such as inheritance protection and seeking guidance from financial experts, you can make informed decisions that not only protect your family's financial future but also align with your broader estate planning goals. 

Ultimately, careful consideration and expert advice are key to understanding the equity release impact on your family's inheritance, ensuring a well-planned legacy for your loved ones.

Learn More: Equity Release and Tax