Equity Release and Inheritance Tax

A Beginner's Guide to the Equity Release and Inheritance Tax

We live longer than ever before, and many people are now opting for an equity release to fund their retirement. This is a financial planning arrangement that allows the person to sell part of their property in return for a lump sum or income.

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Understanding Equity Release and Inheritance Tax

Think about this for a moment:

What happens if you die before you have paid off the loan? That’s where inheritance tax comes in. We’ll find out more about this, as well as some other viable options available to retirees.

What Is Equity Release?

An equity release is a financial arrangement that allows an individual to borrow against the value of their home in return for regular repayments.

This might be used as part of your retirement plans if you want some more funds or security, but it should only ever be seen as a last resort.

Additionally,

This option could come into play because when we retire, there can often be less income than before – and sometimes even no pension at all!

We may also have other commitments such as paying off debt, maintaining living standards, and looking after dependents. Many people are now opting for an equity release to fund their retirement with today’s prolonged lifespans.

What Is Inheritance Tax?

Inheritance tax is a levy that the government will take from your estate when you die. It’s based on what has been left behind and how much of it is in property or other valuable assets – including land, businesses, shares, cars, furniture, and so on.

Inheritance tax is not the same as capital gains tax – even if you are selling your property that will be classed differently and may have a lower rate applied to it.

Let’s have a look:

The Inheritance Tax threshold in England and Wales for 2019-20 is £325,000 per person (a married couple can pass up to £650,000 between them).

In Scotland, the limit was set at £300,001 from April 2017 until March 2020 and now sits at just under £350,000. Northern Ireland has no inheritance or estate duty.

What doe this mean?

This means that anyone with an income of over this amount should consider taking steps while they’re alive to reduce their taxable estate when they die by using trusts or other measures such as making tax-free gifts.

Some people have inheritance tax reliefs, which means they pay less than their full potential, but this can be an issue to consider for those without these.

Who Is Affected by Inheritance Tax?

Anyone with an estate worth more than the threshold is liable to pay inheritance tax.

This includes children who will have a duty to ensure their parent’s assets go according to their wishes and not, for example, spend all on themselves or give it away in their lifetime (unless they are due some of these assets).

Parents can also benefit from this by passing on wealth earlier – even if they don’t want to leave it behind.

That way, there won’t be anything left that could attract death duties when you die, and your heirs get what would’ve then passed down anyway!

When Is Inheritance Tax Due?

Inheritance tax is due when you die – but before the assets can be distributed to your beneficiaries.

The inheritance tax rate depends on how much money is passed down and what percentage will have been subject to income or capital gains taxes in its lifetime, so it’s worth considering both these factors at once.

What does this mean for you?

This means that if some of your estates have already paid a higher rate than others, then this may mean they are exempt from paying any more upon their death!

How Does Equity Release Affect Inheritance Tax?

Equity release only affects inheritance tax in one way – it can reduce the amount of your estate, which is subject to death duties.

This means that the IHT-free allowance increases for any estates on top of this threshold and thus reduce how much will be taken from each person’s share when you die.

When you borrow on your property, it’s worth considering how this will affect the value of your estate for inheritance tax purposes.

Simply put:

A portion of each repayment goes towards paying off the equity release loan. Some may be considered taxable as income, which could increase the amount payable at death if there are no other savings or assets to pay with.

The government has a system in place where they can ask you for more money before you die, but this would nullify any benefit from taking out an equity release plan in the first place!

How Can You Avoid Inheritance Tax?

Let me show you:

  • Consider if you have any inheritance tax reliefs and take advantage of these while you can.
  • Ensure your children or other beneficiaries are aware of what is going to happen – consider how they will receive their share, for example, whether it would be better that they get a set percentage rather than the whole lot which could lead them into debt (even though this might not seem like an issue now).

This means that whoever inherits from you knows about all aspects, including what debts there may be on top of that!

  • Make smart investments to increase your estate’s value to reduce the amount subject to death duties.

For instance, invest in shares where capital gains taxes won’t apply; buy land and property to make it more valuable and increase your chance of not paying any death duties.

  • Take out an equity release plan but be careful that this doesn’t trigger a request for more inheritance tax from the government before you die!
  • Consider giving assets away in a lifetime – then there will be nothing left over when you die, which could attract inheritance or estate duty tax.

This is called “gifting.” You can gift money, shares, land, etc., to anyone, so they don’t get included in your estate at all.

It’s worth noting, though, that if one person dies within seven years of making tax-free gifts with no other beneficiaries outside their family group (for example, grandparents who give things solely to their grandchildren), these may have some liability for inheritance or estate duty tax.

  • Consider your age and the fact that death duties are due before you die – if this is going to be imminent, it might be worth giving away assets.

At the same time, you’re still alive, so they don’t have any value for inheritance or estate duty taxes when you do eventually pass on.

Inheritance Tax When Gifting Equity Release Funds

Inheritance taxes are due when a person dies – but what about the situation where someone has taken out equity release to gift funds?

Now:

If there is no liability for inheritance or estate duty tax on these loan repayments, then this means they can be gifted away from an IHT perspective.

The only thing that would attract any more death duties here is if you were gifting money that had already been stripped of its IHT liability by way of capital gains tax during its lifetime and therefore was subject to income as well.

This might sound like a confusing bit of information at first glance, but it’s worth understanding how much needs paying before you die so you don’t trigger further taxation!

Common Questions

How Do I Avoid Inheritance Tax On My Property?

Can You Take Out Equity Release Without Paying The Inheritance Tax?

Do You Need To Pay Income Tax On An Equity Release Loan Repayment When Gifting?

Does Equity Release Reduce Inheritance Tax?

In conclusion

In simpler terms:

Equity release loans can help you to borrow on your property without having to sell it.

But be careful not to trigger inheritance tax before death by taking out an equity release loan!

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Editorial Note: This content has been independently collected by the EveryInvestor advisor 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.
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