Can I Still Leave an Inheritance With an Equity Release Plan?
There is a common myth that if you release equity on your property, you will not be able to leave an inheritance for your loved ones.
This article is going to address this myth and explain why it is not the case, primarily because there is a ‘inheritance protection guarantee’ in many equity release plans.
Does Equity Release Affect Inheritance?
Though we have pointed out that you can leave an inheritance if you take out equity, it is important to read the fine print of your plan before agreeing to it, as some schemes are not favourable for people who have dependents.
At the end of the day, equity release is a risk, and it is one that you usually take for your own immediate benefit, so you must keep in mind that it can affect the amount of inheritance you leave behind when you pass away.
In the vast majority of cases, it will reduce the amount of inheritance, so consider whether this is worth it before you make a final decision.
Equity Release and Inheritance Tax: Lifetime Mortgages
When we talk about inheritance and lifetime mortgages, we often discuss the negatives. We focus on the fact that taking out a lifetime mortgage, which is the most popular type of equity release, can lead to less money for the homeowner’s beneficiaries.
This is because when the property is finally sold, the proceeds must cover the equity release loan, including any interest that has built up, so dependents have less money to work with.
However, something that is mentioned less often is the positive impact of equity release on inheritance tax. With a traditional mortgage, beneficiaries must pay 40% tax on assets above £325,000.
However, with an equity release mortgage, the money released from the property is not liable for inheritance tax, so families can benefit from this.
What’s more, if the homeowner used the equity release funds to help out a loved one, once seven years pass, they will not have to pay inheritance tax on the money.
Inheritance Protection with a Home Reversion
With a home reversion, there is more scope to protect some of your money for your loved ones.
Generally, you are allowed to separate a portion of your home and reserve it for your loved ones, so you will die knowing that they will be looked after with the inheritance left.
As with lifetime mortgages, the money left over from a home reversion is not subject to inheritance tax, so again, families will receive more of the borrower’s money when the former dies or moves into long-term care.
What is a Protected Equity Guarantee?
As we mentioned above, it is sometimes possible to save some of the value of your home to pass on to your loved ones.
This is officially called a protected equity guarantee, and it works as follows: you will choose a percentage of your home to protect, and if the percentage is very high, you will receive a small loan, whereas a low percentage can lead to a high loan.
Though we associate inheritance protection with home reversion, many different types of equity release plans offer protected equity guarantee nowadays.
Which Schemes Offer Protected Equity Guarantee?
If you are considering equity release but you have funds you want to pass on to your beneficiaries, you can find a wide range of lifetime mortgage plans that accommodate this.
It is usually best to look at the more modern schemes as they are more likely to have an in-built form of protection. As stated above, you can also rely on home reversion for this protection.
Will My Beneficiaries Get Less Inheritance With a Lump Sum or Drawdown Plan?
In general, we would say that a lump sum plan is worse for inheritance than a monthly repayment scheme, such as a drawdown mortgage.
With a lump sum plan, you are taking out all the money at once and paying interest on it, so the cost is high.
However, with a drawdown mortgage, you can withdraw cash when you need it, meaning interest is paid back at a reduced rate overall and you may not even need to spend all of the money.
What Other Techniques Can I Use to Protect My Inheritance?
One great technique is to take out a voluntary repayment lifetime mortgage. With this arrangement, you are allowed to repay your loan whenever you see fit, so your family would be left with less debt.
There are no early repayment penalties with this plan, so it’s a great way to protect your equity release funds.
You could also consider an interest-only plan, which is where you pay back some or all of the interest of your loan each month, which again leaves your family with less debt as you will owe less money overall.
Finally, if you want to take care of your family while you are still alive, you could take out a lump sum plan and gift money to your family. This works for people who have a specific purpose for their money, such as gifting a loved one with a deposit for a house or money for renovations.
When your house is eventually sold, there would be less concern within your family as your loved ones would have already benefited from your income.
What Happens If I Move Into Long-term Care or Pass Away?
When you go into long-term care or pass away after releasing equity, the money generated from the sale of the property will first be put towards your loan so that the equity release provider benefits from the scheme.
After this, the remainder of your money will go to your family, and the amount will depend on how much of your house you have protected for them.
If there is no immediate family to inherit the rest of your money, it will be passed on to distant family members, and if there is no one at all, it will go to the Crown.
Can I Speak to an Adviser About How Much Equity I Can Release & When it Must Be Paid Back?
Yes, we recommend that you speak to an adviser before making any drastic decisions.
There are lots of things to consider when you choose to take equity release, and most people are not in the position to decide what they want to do until they have done more research and been presented with a personalised illustration by an equity release adviser.
It’s worth prioritising plans that offer an inheritance protection guarantee, as leaving an inheritance is important for many of us, so you want to ensure the amount available to your loved ones after you pass away is enough to help them out.
For practical advice about the relationship between releasing money from your home and protecting your inheritance for your children or grandchildren, contact us to speak to one of our advisers.
You can either fill out our call-back form or ring 0330 058 1579 for more information.
To find out if you are even eligible for equity release in the first place, use our equity release calculator. Alternatively, call us for an accurate quote of how much money you could release from your property.