How Inheritance Protection with Equity Release Works in the UK?

Can You Use Equity Release to Lower Inheritance Tax? Can I Guarantee Equity for My Heirs? Can I Pay Off My Equity Release Before I Die? Learn More Here…
  • Last Updated: 06 Feb 2024
  • Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.

Contributors:

Francis Hui

Key Takeaways

  • Equity release Inheritance Protection in the UK allows you to ring-fence a portion of your property's value to pass onto your beneficiaries, regardless of the total amount borrowed through equity release.
  • Equity release can reduce the value of your estate, potentially affecting your inheritance as the loan and any accrued interest are repaid from your property’s sale after your death.
  • By opting for this feature, you can safeguard a percentage of your property's value for your heirs.
  • Risks could include reduced borrowing capacity and potential impact on means-tested benefits.
  • Several equity release schemes in the UK offer Inheritance Protection options to safeguard a portion of your property's value for your loved ones.

Equity release inheritance protection takes the worry out of whether there’ll be anything left for your heirs when your equity release is paid off. 

There are several routes you can take if you have an equity release plan and want to preserve your legacy.

In This Article, You Will Discover:

    The Every Investor team’s here to help put your mind at ease with this comprehensive guide.

    We aim to provide a guide on equity release inheritance protection in the UK, in order to help you make informed decisions while considering various financial scenarios and potential risks to your family's financial future.

    Our researchers have spent hundreds of hours poring over the latest equity release news and developments to put together this handy guide, and all our content undergoes extensive quality checks and financial compliance moderation before it’s released.

    The following sections will provide further information about equity release inheritance protection.

    What Does Equity Release Mean?

    Equity release, accessible to individuals 55 years and older, provides a method for homeowners to release the financial value embedded in their property.

    This approach is often utilized for augmenting retirement incomes, debt consolidation, or financing lifestyle changes.

    The two chief forms of equity release are lifetime mortgages and home reversion plans.

    With a lifetime mortgage, you secure a loan against your home, which is repayable from the proceeds of your estate.

    Home reversion entails selling a share of your property for an upfront payment or regular income, while continuing to live in the home.

    Learn More: Equity Release Meaning

    What’s Inheritance Protection?

    Inheritance protection’s a mechanism that allows you to exclude a portion of the value of your property from your equity release agreement in order to make sure your heirs will be able to inherit it, regardless of how much is owed on your loan.

    What does that mean?

    Even after your property’s sold and the equity release loan repaid, your heirs are guaranteed to receive the portion you excluded from the loan. 

    However, the actual inheritance amount could be influenced by various factors, such as equity release conditions and loan terms.

    What Is the Role of Inheritance Protection in an Equity Release Scheme?

    Inheritance protection is a crucial component of an equity release scheme, ensuring a percentage of your estate remains unscathed for your heirs.

    By setting aside a portion of your property's value, it safeguards a guaranteed inheritance, regardless of the accumulated loan amount.

    It's a way to reap the benefits of your property's equity while preserving a legacy for your loved ones.

    The role of inheritance protection sheds light on responsible financial planning.

    It underscores the importance of balancing immediate monetary needs with long-term estate preservation.

    It's important to stress the significance of considering future implications when exploring equity release, thus inheritance protection becomes a fundamental aspect of any equity release arrangement.

    How Can Equity Release Impact Inheritance?

    Equity release can impact inheritance by reducing the value of your estate and, consequently, leaving your heirs with a diminished inheritance. 

    Can I Protect an Inheritance With Equity Release?

    Yes, you can protect an inheritance with equity release in three ways, depending on your needs and circumstances, but it’s essential to weigh the benefits against the potential risks associated with each method. 

    The ways in which to protect an inheritance are:

    • Opting for a plan with an inheritance protection guarantee.1
    • Paying off the interest monthly. 
    • Making partial repayments of the capital to lower the total value of the loan.

    Inheritance Protection With Equity Release: How Does It Work?

    Inheritance protection with equity release works by guaranteeing an inheritance for your beneficiaries.

    Here’s an example for illustration

    Lenders normally allow you to access 25 to 60% of the value of your property2, though this percentage may vary based on the lender's criteria, the borrower's circumstances, and the specific equity release product.

    Let’s say your house is worth £200,000, and you’re able to secure a 50% equity release plan (for £100,000).

    You could choose to ringfence 20% of that £100,000 as an inheritance protection guarantee for your heirs.

    That means you’d only be able to access 30% of your equity through your equity release loan.

    3 Things to Consider With Inheritance Protection on a Lifetime Mortgage

    The 3 things to consider with inheritance protection on a lifetime mortgage are the bale of the equity you’ll have access to, the percentage of your home’s value you’re protecting, and the costs (if any) of having the guarantee as part of your equity release plan.

    Here are the details:

    • By allocating some of your home’s value to inheritance protection (e.g. 20%), you may lower the accessible equity by that percentage; however, this could be influenced by the specific terms of your equity release plan and other financial factors.
    • The percentage you’ve allocated is static, but if house prices increase, your heirs will get more money for the percentage you’ve allocated.
    • Check whether your lender charges for including an inheritance protection guarantee on your equity release plan and what the implications would be.

    What’s the Upside of Receiving a Smaller Inheritance With Equity Release? 

    The upside of receiving a smaller inheritance with equity release is that the amount of inheritance tax your heirs may have to pay will most likely be lower, but it's important to consider other potential risks or drawbacks associated with reducing the inheritance amount.

    In terms of the UK’s equity release inheritance tax regulations, there’s a tax-free threshold of £325,000 per person.3

    What does that mean?

    If you leave your house and other assets to your children and your estate’s value exceeds the threshold and other allowances, they’ll end up paying a hefty 40% inheritance tax. 

    Here, equity release works to your heirs’ benefit, because you’re essentially taking money out of your estate, which could lower its value so it doesn’t meet the threshold for inheritance tax.

    If you’d like you could use the money you’ve released from your home to provide your loved ones with a living inheritance. 

    How Can Equity Release Help UK Homeowners Give a Living Inheritance? 

    Equity release can help UK homeowners give a living inheritance to their loved ones by unlocking a portion of the value tied up in their property. 

    A living inheritance allows homeowners to provide financial support to family members while they're still alive, rather than waiting for the inheritance to be passed down after their death.

    By gifting a living inheritance, homeowners can potentially reduce the value of their estate, which may lower the inheritance tax liability when they pass away; however, it's important to consider the possible implications and risks of this strategy. 

    However, specific rules and exemptions apply to gifting and inheritance tax, so it's essential to consult with a tax adviser or financial planner to understand the implications of giving a living inheritance.

    Common Questions

    What Is Equity Release Inheritance Protection in the UK?

    How Does Equity Release Affect My Inheritance?

    Can I Protect My Inheritance with an Equity Release Plan?

    What Are the Risks of Equity Release Inheritance Protection?

    Are There Options to Safeguard Inheritance in Equity Release Schemes?

    Can I Use Equity Release for Inheritance?

    What’s a Living Inheritance?

    Can I Repay My Equity Release Loan Before I Die to Restore My Inheritance?

    What Are My Voluntary Repayment Plan Options?

    Will My House Have to Be Sold to Repay My Equity Release Loan?

    Can Partial Repayments Impact Inheritance?

    What’s the Impact of Equity Release on Inheritance Tax?

    In Conclusion

    When planning your estate, it’s crucial to consider various factors, including the potential benefits and risks associated with different financial strategies, such as equity release.

    While equity release can provide financial security and provide for your care in your golden years, you also want to secure your family’s future.

    An inheritance protection guarantee, paying back some of your loan, or even gifting some of your equity to your beneficiaries while you’re still alive are some of the options you can look at when considering equity release inheritance protection.

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