Equity Release & Inheritance Tax: What You Must Know

Do You Want to Know Everything About Inheritance Tax & Equity Release in 2022?
Contributors: Nicola Date, Katherine Read. Edited by Rachel Wait & Reviewed by Francis Hui
Are You Looking for the Ultimate Guide on Inheritance Tax & Equity Release in 2022? Learn More About Inheritance Tax Obligations & Inheritance Tax When Gifting Equity Release. Keep Reading to Get the Answers You Need.

If you’re an existing equity release user or are thinking of using it, you might wonder what impact the cash you get will have on inheritance tax when you pass away?

The last thing you want to do is leave your beneficiaries in a messy tax situation once you’re gone, so you should get all the information now to understand exactly what you’re getting into.

We’ve worked hard to find answers for you about equity release and inheritance tax, so you don’t have to.

As experts in our field, we discuss the following in this article:

    Our team at EveryInvestor makes sure that we research the latest market trends so that we can bring you the best information to help you plan your finances properly.

    Before You Start Reading….

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    How Does Equity Release Affect Inheritance Tax?

    Equity release will significantly affect the amount of inheritance tax your estate1 will need to pay one day when you pass away.

    Effectively, your home will be sold to cover the lifetime mortgage balance and any interest charged on the loan; if any money is left, goes towards your estate.

    How much money is left in your estate will determine how much inheritance tax your estate will need to pay.

    What Are Your Inheritance Tax Obligations?

    Your inheritance tax obligations are determined by how much your estate is worth when you pass on one day.

    There are certain thresholds you need to reach before tax is due.

    Let’s take a look at the details.

    When Is Inheritance Tax Due?

    Inheritance tax is due when your estate’s assets are worth more than £325,000 if you leave your assets to beneficiaries who aren’t your spouse or your registered civil partner.

    However, this is also subject to certain conditions, such as if you leave your home to your beneficiaries as part of your estate.

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    What’s the Inheritance Tax Threshold?

    The inheritance tax threshold is £325,000, so if your estate’s assets are worth less than £325,000, this is known as the nil-band, and your estate will not pay any inheritance tax.

    If you leave property to your direct descendants, such as your children or grandchildren, then an additional £150,000 allowance is not subject to inheritance tax.

    This means that for direct descendants, the tax threshold on inheritance tax is £475,000 per individual that’s passed on.

    Who Pays Inheritance Tax?

    If you pass on and leave your estate’s assets to your spouse or registered civil partner, then there is no inheritance tax due, regardless of how much the estate is valued at.

    Should your direct descendants be your beneficiaries, they can receive up to £475,000 tax-free; if the estate value exceeds this, then they’ll need to pay inheritance tax.

    Inheritance Tax When Gifting Equity Release Funds

    When you gift your loved ones an early inheritance from your equity release funds, it can potentially reduce the inheritance tax they may have to pay.

    How Does the 7-Year Rule Work?

    The 7-year rule works in that if you gift someone an inheritance from equity release funds, they don’t pay inheritance tax if you don’t pass away within 7 years of gifting them the funds. 

    However, if you pass on within 7 years and the money you’ve gifted them is above the nil-tax band, they’ll have to pay 40% tax on the value above £375,000.

    How Can Equity Release Be Used as Part of Inheritance Tax Planning?

    Equity release can be a great tool that can be used as part of your inheritance tax planning.

    If you’ve got a home and it’s worth £2,500,000, and you’ve got other assets of around £300,000, your beneficiaries could be faced with an inheritance tax bill of £740,000.

    Using equity release to gain access to £1,200,000 with a retirement interest-only mortgage, you can reduce your property assets to £1,300,000.

    The £1,200,000 you gain can be gifted to your children, and if you don’t pass away during the 7-year period, they won’t have to pay any tax on the funds they’ve received.

    This means that you could potentially save £740,000 in inheritance tax for your loved ones.

    Common Questions

    What Happens if You Inherit a House With Equity Release?

    How Can I Avoid Inheritance Tax for My Beneficiaries?

    Does Equity Release Reduce Inheritance Tax?

    Can You Inherit Equity Release Debt?

    In Conclusion

    It’s essential that you discuss your tax planning with your financial adviser to make sure that you arrange your affairs correctly so that you don’t have any unforeseen issues.

    Equity release can be a great way to plan for inheritance tax to lower the tax payable by your beneficiaries when you pass on.

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    Editorial Note: This content has been independently collected by the EveryInvestor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.