Over-50s Unlocking Home Wealth to Beat Inheritance Tax!

In recent times, an increasing number of over-50s in the UK are turning to equity release mortgages as a savvy financial strategy. These plans are not just a means to reduce inheritance tax bills, but also a way to fund home improvements and clear existing mortgages. Despite relatively high interest rates, financial planners are observing a significant uptick in people opting for this option.

The Numbers Speak: A Surge in Equity Release

The Equity Release Council has revealed eye-opening figures: a 10% rise in new customers and an 8% increase in total lending in the third quarter of 2023. Specifically, 7,379 new and 8,466 returning customers borrowed a whopping £716m between July and September. This surge coincides with a noticeable increase in the number of people paying inheritance tax, with HMRC figures showing a 17% jump compared to the years 2020 and 2021.

How Does Equity Release Work?

Equity release, primarily through lifetime mortgages, allows homeowners over 55 to unlock cash from their homes while continuing to live in them. Legal & General highlights that people commonly use this for financial gifts, home improvements, and paying off existing mortgages to reduce monthly outgoings. The beauty of it? No commitment to monthly payments, as the interest can be settled when the homeowner either passes away or moves into residential care.

The Inheritance Tax Angle

Inheritance tax rules are a key factor, according to an article in Inews. Normally, no tax is due if your estate is below £325,000, or if you leave everything above this threshold to your spouse, civil partner, a charity, or a community amateur sports club. Gifting your home to your children or grandchildren can bump up this threshold to £500,000.

Nick Onslow from Progeny Wealth illustrates with an example: a single, childless individual with no pension and a home worth over £325,000 can significantly benefit from equity release. By taking a lump sum out of the estate and spending it, the inheritance tax burden on beneficiaries reduces. If you survive seven years after gifting this money, the inheritance tax might not even apply.

But, There Are Considerations

However, the increasing popularity of equity release comes with its caveats. The current average interest rate stands around 7%, a steep climb from the record low of 3.86% in 2021. This means a £50,000 loan could balloon to £203,000 over 20 years. Many plans, though, assure that the debt won’t exceed the property’s value.

To mitigate the risk of escalating debt, Andrew Morris from Age Partnership advises making regular interest payments, a feature now available in all new equity release plans.

Real-Life Impact: A Case Study

Take Julie Sedgwick, 72, from Weymouth. Post her husband’s demise, she borrowed £55,000 through equity release, valuing her home at £380,000. She aimed to enhance her savings and support her sons without relocating. Opting for an Optional Payment Lifetime Mortgage with Legal & General, she maintains the flexibility to pay interest monthly and can stop anytime.

Weighing Your Options: Advice is Key

Equity release could be a prudent choice for those with limited savings unwilling to move. However, the high interest rates and potential impacts on state benefits necessitate careful consideration. Seeking financial and legal advice is crucial to evaluate the pros and cons thoroughly.

A Word of Caution from the FCA

The Financial Conduct Authority (FCA) has recently cautioned against advisers prioritising commission over clients’ best interests. It’s essential for lifetime mortgage advisers to focus on the consumers’ needs and provide clear, fair, and unbiased guidance.

In summary, equity release is an increasingly popular strategy among the over-50s, offering a way to manage inheritance tax and improve financial flexibility. However, it’s a decision that requires careful thought and expert guidance.