How does equity release affect inheritance?

While equity release can be a good way for older homeowners to tap into the wealth they have built up within their homes, many will have concerns about how it will impact the inheritance they leave behind. For many people their home will form most of their estate, which ultimately makes this an important decision to make.

Equity release allows you to borrow money against the value held in your home. You will not need to repay the amount you borrowed until you move into long-term care or die. So, until then, you will be incurring interest charges.

This is crucial to understand because it means the longer you live, or delay moving into long-term care, the less your estate will be worth.  

Many equity release plans now allow borrowers to make partial repayments, which again can reduce the diminishing impact equity release lending has on inheritance. Essentially, this is a feature which allows you to make partial repayments free of charge on your equity release plan and is usually capped to a certain percentage of the amount you borrowed.  

It is important to remember that in March 2022 the Equity Release Council released the fifth product standard on the market. This new rule means all new customers taking out an equity release plan will be guaranteed the right to make penalty-free partial loan repayments to reduce the cost of later life borrowing, subject to lender criteria.  

Another important factor to consider is the impact on inheritance tax. Currently, other than if you have a surviving spouse or civil partner to inherit your estate, when you die your beneficiaries will often have to pay inheritance tax of 40% on assets and wealth above £325,000. The money used from the sale of the property to repay the equity release loan is deducted from the inheritance so is not liable for inheritance tax.

As well as this, if you use your borrowed money as a gift to your children or grandchildren, after seven years they will not have to pay inheritance tax on the money. If you die before seven years of making the gift, inheritance tax may need to be paid with the amount depending on how long ago the money was gifted.

Clearly, equity release can have a significant impact on inheritance and, as a result, before taking out equity release borrowers should have a conversation with family members to discuss their options. As well as this, borrowers should get advice from an independent financial adviser to discuss the impact equity release will have on the inheritance they will leave behind and whether there are alternative options that would better suit their circumstances.