PF Financial

How does equity release affect Inheritance Tax?

An equity release scheme is an attractive proposition for a lot of homeowners over the age of 55-years-old. This gives them the ability to access either a lump sum of cash, monthly payments, or a mixture of both. Whether it is to have a better standard of living, make home improvements, or help your children fund their first property, an equity release scheme can be beneficial. However, there is a lot that needs to be factored in when determining whether or not this is right for you. This includes determining what impact equity release would have on Inheritance Tax. So, let’s take a look…

What is Inheritance Tax?

Inheritance Tax, often shortened to IHT, is a tax on your estate when you pass away. Your estate refers to any property, possessions, and money you have. If your estate is valued below £325,000, you won’t have any Inheritance Tax to pay. The same applies if everything above £325,000 is left to your civil partner, spouse, a community amateur sports club, or a charity. The threshold increases to £500,000 should you decide to leave your home to your children or grandchildren, with stepchildren, foster children, and adopted children included in this. 

The relationship between equity release and Inheritance Tax

If you release equity for the purpose of gifting money to another individual, this will be exempt from Inheritance Tax so long as you live for seven years after this and you do not get any indirect or direct benefit back. However, should you die within seven years of the gift being made, it will be brought back into your account to determine the tax paid on your estate when you pass away. 

If you give over £325,000 to a beneficiary who is non-exempt and you die within three to seven years of this happening, a “taper relief” can be applied to the tax that is payable on the gifts. 

Make sure you seek Inheritance Tax advice before taking out an equity release

Prior to agreeing to any equity release, it is imperative to receive expert advice regarding Inheritance Tax planning. Everyone’s situation is different, so it is imperative that you speak with an experienced financial advisor who can advise you on our circumstances. 

While taking out an equity release mortgage can end up reducing the amount of IHT you need to pay, it is never advisable to take out this sort of scheme purely for the purpose of lowering the tax.

Hopefully, you now have a better understanding of the impact that an equity release scheme can have on your inheritance tax. The best thing to do is to use an equity release calculator so you can determine whether or not an equity release mortgage is going to be the right solution for your current financial situation.