Should we take out Equity Release to manage IHT liabilities?
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My wife and I are in our seventies and are concerned about Inheritance Tax. Our home is worth £1.8 million and we don’t have any other savings or investments. I have a good pension from serving in the armed forces and my wife has her state pension plus a small private pension. We don’t want to downsize – we want to leave our home to our son. Should we take out Equity Release on the house so we can give away money to family members to reduce our estate?
Diane Fish and Phil Beck of Smith & Pinching respond:
Equity Release may give you the opportunity to manage your future IHT liabilities, allowing you to spend more than your income or to reduce your wealth using lifetime giving, but there are drawbacks.
Equity Release can take the form of a lifetime mortgage – the most popular option these days – or a home reversion plan. With a lifetime mortgage, you borrow against the value of your property with the loan repaid when whichever of you lives the longest sells the house, moves into long term care or dies. A home reversion plan involves selling a percentage share of your property to the provider, who will take that percentage of the sale proceeds when the property is eventually sold.
The problem with both of these scenarios is that the loan must be repaid at some stage, so if your son wants to live in your home after you die, he will need to find the capital or take out borrowing himself to settle the outstanding loan and any interest due. I think it is critical that you discuss this with your son before deciding what to do.
It may be helpful if you – and your son – meet with an independent financial adviser to explore other options to mitigate the future IHT liability, as well as considering Equity Release. You should consider all the costs – fees and interest – of an Equity Release arrangement and compare these to the potential IHT that would be payable on your estate.
Taking out a Lifetime Mortgage/Equity Release arrangement will mean that the value of the estate you leave to your family when you die will be reduced. It may also affect your entitlement to any means tested benefits both now and in the future. Equity Release can be more expensive when compared to a normal residential mortgage. In addition, you will still be responsible for maintaining the property.
This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration. There will be a fee for Equity Release/mortgage advice. The precise amount will depend upon your circumstances, but we estimate that it will be a minimum of £1,100. Any opinions expressed in this article do not constitute advice.
For more information, please visit www.smith-pinching.co.uk
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