Equity Release and Inheritance Tax

Equity release is a major decision, especially if your home is your largest asset. It’s crucial to understand how it affects what you’ll leave behind. Saga has a breakdown to make it simpler, summarised below.

What is Inheritance Tax?

Inheritance tax is charged on the estate (property, money, and possessions) of someone who has passed away. Here’s how it works:

  • Under £325,000: No tax if the estate’s value is below this threshold (2023/24 tax year).
  • Over £325,000: Estates above this value, not left to a spouse, civil partner, or charity, face a 40% tax on the excess.
  • For Couples: Unused tax-free allowance can be transferred to a surviving partner.

More detailed information is available on the gov.uk website.

How Equity Release Affects Inheritance Tax

Equity release reduces the capital passed to beneficiaries. It involves receiving a lump sum or regular payments, to be repaid when you pass away or enter long-term care. This often leads to the sale of your home to pay off the debt, affecting what your beneficiaries inherit. However, they may choose to settle the debt without selling the house.

Types of Equity Release Schemes

Different schemes have varied impacts on inheritance.

  1. Lifetime Mortgage:
    • Borrow against your home, repaid upon death or moving into care.
    • You can make ad hoc payments to reduce the loan cost.
    • Providers often offer a ‘no negative equity’ guarantee.
    • The amount left after repaying the loan may be subject to inheritance tax.
  2. Home Reversion Plans:
    • Sell part or all of your home but retain living rights.
    • On passing or moving into care, the sale proceeds go to the company.
    • This allows leaving some inheritance, although the payout is usually less than the market value.

Reducing Interest Bills on a Lifetime Mortgage

  • Drawdown Option: Release money as needed, reducing total repayable amount.
  • Paying Interest Monthly: This can help maintain the original capital, improving the chances of leaving an inheritance.

Equity Release to Reduce Inheritance Tax

Releasing equity and gifting it can reduce inheritance tax:

  • Annual Exemption: Gift up to £3,000 yearly without adding to estate value.
  • Seven-Year Rule: Gifts become exempt from inheritance tax if you live for seven years after making them.
  • Taper Relief: If you pass away within 3-7 years of gifting, less tax may be owed.

Be cautious with lifetime gifts over £325,000 as they might impact the recipient’s tax status.

Remember, equity release will reduce the value of your estate and may affect your entitlement to means-tested state benefits.


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