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Equity Release and Inheritance Tax: How Much Might You Have to Pay?

The short answer, and the one our clients love to hear, is that you do not have to pay any inheritance tax on equity release funds unless they exceed a certain amount.

In fact, you do not have to pay tax at all on equity release money, as it is classed as a loan rather than income, so it is treated like traditional loans in the sense that it is exempt from tax (1).

Many of our customers have concerns surrounding leaving an inheritance after taking out equity, both relating to tax and to other issues.

We do not want this to ever deter anyone from using equity release products, as we believe it is possible to release equity and still leave a healthy inheritance.

Today, we are going to explain the relationship between equity release and inheritance tax in great detail, as well as addressing some frequently asked questions on the topic of equity release in general.

Please call our 24-Hour Helpline: 0330 058 1579

What are the Concerns Surrounding Equity Release and Inheritance?

Firstly, there is a misconception that releasing equity prevents you from leaving an inheritance to your loved ones, so some people avoid equity release at all costs for fear that they will not be able to look after their loved ones when they are no longer around.

Secondly, many people do not realise that equity release funds are not subject to inheritance tax up to a certain point, so they worry that even if they left some money to their beneficiaries, it would be taxed highly, and this would leave their loved ones with a small amount of money given that equity release already reduces the money left when you pass away.

Finally, with home reversions in particular, some people fear that there is no possibility to save money for their family as they have given their home away and signed it away to the equity release provider.

Below, we are going to address each of these concerns separately and explain why people don’t need to rule out equity release if they are keen on leaving an inheritance.

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Are People Right to Worry About Their Inheritance When They Take Out Equity?

We do not want to discount the concerns people have about equity release and inheritance, as they are valid worries that have the potential to affect the amount of money homeowners are able to leave to their beneficiaries when they pass away.

Having said that, these concerns are based on misconceptions about equity release, so we want to explain why they shouldn’t discourage you from taking out an equity release product.

Firstly, we explained that some prospective equity release consumers are worried that it will be impossible for them to protect their loved ones’ inheritance.

We can categorically state that this is not true. The funds may be decreased, but provided that the homeowner has additional money besides their loan, this will go to their family.

Secondly, we talked about how some people think equity release money is liable for inheritance tax.

Again, we can tell you that this is completely false. Equity release loans are never subject to inheritance tax unless the funds are extremely high, and this is one of the many draws of using an equity release product.

Finally, let’s tackle the misconception that it is impossible to leave an inheritance when you have a home reversion.

The truth is that the vast majority of home reversion schemes allow you to request inheritance protection, so you can save a share of your home (that will likely increase in value) for your beneficiaries.

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Equity Release and Inheritance Tax: How Does It Work?

Taking out an equity loan secured against your property actually reduces your estate’s value, so in the vast majority of cases, it will be below the inheritance tax threshold and your family will not have to pay inheritance tax.

If your estate does not fall under the threshold, the amount of inheritance tax that would be due is still very low compared to if you hadn’t taken out equity.

Equity Release and Inheritance Tax: When Is it Due?

If you do need to pay inheritance tax, it must be paid within six months of your loved one’s death, so you have some time to organise your money and discuss the situation with your family.

Please note that inheritance tax applies to the estate of the homeowner, as well as any financial gifts they have made in the seven years leading up to their death.

How Much Might You Have to Pay & What is the Threshold For Inheritance Tax?

The rate for inheritance tax is 40%. This will have to be paid if the value of the homeowner’s estate is over £325,000 (2). Evidently, if they have taken out equity, it is extremely unlikely that they will reach the threshold for inheritance tax.

It is also possible for a homeowner to leave their money to their spouse, which would make their funds exempt from inheritance tax even if they reached the threshold.

Please call our 24-Hour Helpline: 0330 058 1579

Gifting Money to Family and Friends

As we mentioned above, any money that a homeowner gifts to a loved one is liable for inheritance tax if the homeowner passes away within a seven-year timeframe after gifting the money. However, if the money was gifted earlier than that, it will not be taxed.

Inheriting a House With Equity Release

If you have browsed other sections of our website, or you have researched equity release on other sites, you will now know that the property of an equity release consumer must always be sold when they die or go into long-term care.

For this reason, you would not inherit a house with equity release, as the lender would always sell it on and take the proceeds that cover the cost of the equity release loan. However, you could inherit some of the money left over from the property sale.

Please call our 24-Hour Helpline: 0330 058 1579

Which Equity Release Plans are Best For Leaving an Inheritance?

The truth is that most modern equity release plans allow you to protect some funds for your family, so you can opt for any type of equity release provided that you check the lender is willing to implement inheritance protection.

This applies to both home reversions and lifetime mortgages, but it does depend on the stance of the mortgage lender you choose to go with, which is why we recommend getting quotes from a variety of equity release lenders before settling on one.

Frequently Asked Questions About Equity Release

That’s all on equity release and inheritance – we hope we’ve cleared up any confusion. Now, we’d like to tackle some questions that our customers often ask us regarding the practicalities of equity release.

1. Can I Use Equity Release to Purchase a Second Home?

Yes, you can most certainly use equity release to purchase a second home, and the easiest way to do this is by opting for a second home/holiday home plan from the get-go. Speak to a professional adviser and they will guide you through the application process for this plan.

2. Will I Be in Debt If I Release Equity From My Property?

Yes, you will be in debt as you will have taken out a loan that needs repaying, and that is accruing interest consistently. However, the loan does not need to be repaid at any point by yourself as this is done through a house sale, so it is not the same as being in debt with a standard loan.

3. What are the Requirements For Releasing Equity?

To release equity from your home, you must be a homeowner with a property worth at least £70,000, and you must be aged 55 years old or over.

4. How Can I Find a Professional Adviser For Equity Release?

The best place to go is to our ‘contact us’ page, and you could be speaking to an equity release expert in a matter of days. Even better, you could call us yourself on 0330 058 1579 and speak to a member of our team on any day of the week.

Please call our 24-Hour Helpline: 0330 058 1579

5. Do I Need a Solicitor For Equity Release?

Yes, we would argue that you need a solicitor to speed up the legal process and pick up on any flaws in the contract. You could try to do this yourself, but it would be very time-consuming and you would risk making a mistake that could prevent you from getting a loan offer.

6. What Happens If I Want to Move Home?

If you have already released equity and you want to move home, inform your lender and they may be able to provide you with another property, but it must fit their criteria, so it may not be your first-choice home.

7. Will You Tell Me About the Disadvantages of Equity Release?

Yes, we will tell you about the disadvantages of equity release during your consultation. We do not simply focus on the positives, as we want you to understand how equity release works and to do this, we need to explain its risks.

While we do hope that you become an equity release consumer, if the scheme is not right for you, we will pick up on this early on and recommend an alternative, such as a traditional loan, credit cards, borrowing from loved ones, remortgaging your house, or claiming benefits.

8. Can I Discuss The Alternatives to Equity Release Plans With You?

We are trained to educate you on equity release, so we like to focus on this more than anything. However, if you have spoken to us about releasing equity and you have realised an alternative might be more suitable, we encourage you to let us know.

We will be able to tell you about the pros and cons of the alternative and to point you in the right direction for expert advice.

Please call our 24-Hour Helpline: 0330 058 1579

Contact Equity Release Warehouse For More Information

We hope we have clarified how inheritance tax is linked to equity release, and how equity release consumers can benefit from not having to pay tax on the money they leave to their loved ones.

If you are interested in releasing equity and you don’t know where to start, please contact us by calling 0330 058 1579. Our team of friendly advisers are experienced in guiding people through the equity release process, and they would love to help you.

Perhaps you do not have any beneficiaries to leave your money to, and therefore inheritance is not a factor you are considering when deciding whether to release equity.

If that’s the case, the process will be even easier for you, as we can focus on securing you the highest loan, and repayment won’t be a concern.

Whatever your personal circumstances are, don’t hesitate to get in touch with Equity Release Warehouse to figure out whether you are eligible for an equity release scheme, and whether it would benefit you. To find out how much you could release, use our free equity release calculator.

Please call our 24-Hour Helpline: 0330 058 1579


[1] Equity Release Inheritance Tax – What You Need To Know

[2] How Inheritance Tax works: thresholds, rules and allowances

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