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How does equity release affect inheritance?

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Michael Brown

Acting Editor
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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.

Understanding how equity release works

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.  

Can partial repayments impact inheritance?

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.  

Impact of equity release on inheritance tax

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.

Getting expert advice

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.

Speak to an expert equity release adviser today

 

Moneyfactscompare.co.uk's preferred equity release adviser is Mortgage Advice Bureau Later Life

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Discover how equity release could improve your retirement finances.

Mortgage Advice Bureau Later Life offers plans from a panel of lenders. It only offers plans that meet the Equity Release Council's standards to give you extra protection.

Speak to an equity release specialist.

Call 0800 178 7901 or calculate how much you could release.

Telephone calls may be monitored or recorded to enable us to improve services to you.

Unless you decide to go ahead, the service is completely free of charge, as the fixed advice fee of £1,295 would only be payable on completion of a plan.

FAQs

Can my equity release plan leave my loved ones with debt?

No. All equity release plans have a no negative equity guarantee clause, which means you will never owe more than the value of your property.

Must my property be sold when I move into long-term care or pass away?

Every equity release lender requires you to sell your property when you move into long-term care or pass away. Crucially, this means you will not be able to gift your home as an inheritance to your loved ones; they can only inherit any excess cash generated from the sale.  

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.

Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.