For many families, property accounts for the majority of household wealth. Unlocking tax-free cash from the family home via equity release could mitigate a large inheritance tax (IHT) liability and provide more flexibility when passing down wealth to beneficiaries.
IHT thresholds
The threshold above which IHT is payable is £325,000. This allowance, known as the nil-rate band, is transferable to a spouse/civil partner on death, giving couples a potential combined nil rate band of £650,000. If the beneficiaries of the family home are children/grandchildren, you may be able to use the main residence nil-rate band (RNRB) of £175,000 per person. This can boost the total IHT threshold for a married couple or civil partners to £1,000,000.
Reduce your IHT bill
IHT bills can be large, even when allowances are used. In the example below the ‘current situation’ shows the liability a family with £4,000,000 in assets face. Pensions aren’t part of the estate for IHT purposes, so the total taxable estate is £2,500,000. When an estate is valued at £2,000,000+, the RNRB tapers away by £1 for every £2 above £2,000,000, meaning £250,000 of the £350,000 residence allowance is lost. An IHT charge of 40% on the taxable assets results in a tax liability of £700,000.
In the other scenario, a £500,000 equity release lifetime mortgage is implemented, and this tax-free lump sum is gifted to family, reducing the taxable part of the estate by £500,000. Because the full nil-rate band allowances are now available, this reduces the IHT liability by £300,000. Implementing equity release, and using the cash to gift to family members, can be a good way to help children with property purchases, while implementing IHT efficiencies. Gifts of more than £3,000 may be subject to an IHT charge if you pass away within seven years.
Rolled-up interest vs. property growth
Many people worry that the mortgage debt may erode the value of an inheritance. A typical lifetime mortgage involves rolled-up interest, where the mortgage balance increases over time (usually the interest rate is fixed for life). However, as the chart below shows, property growth of just 1% would be enough to maintain the net equity (property value minus outstanding mortgage). Historical house price growth has averaged between 3%–5% over long periods.
Want to find out more about using equity release to reduce IHT liabilities? Call 03300 564 446 to speak to a Lumin expert, or book a free introductory meeting by visiting luminwealth.co.uk/contact.
Important: Equity released from your home will be secured against it. This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Your home or property may be repossessed if you do not keep up repayments on your mortgage. Mortgage availability and terms depend on your individual circumstances and are subject to lender criteria.
