Equity Release and the Residential Family Home
I am often asked by clients about Equity Release products, how they work and how beneficial they are. Equity Release Schemes do have a place for some people and are able to provide much needed income or capital for individuals particularly those of retirement age.
Two main points seem to arise when the subject of Equity Release is raised.
The first is whether Equity Release is a good idea to use and the second, how it affects Inheritance Tax.
When client/s ask me about Equity Release I have to remind them solicitors are regulated and cannot give financial advice, and in addition to that I cannot make the decision for them. However, with all things in life it is good to discuss points and as with any topic I am happy to discuss with our client/s, the basis of their interest.
One of the most important points I suggest to the client/s, or anyone thinking about Equity Release, is to consider wisely all of the circumstances. Whether they have been, or about to be, in talks and discussions about Equity Release. Are the terms and conditions acceptable? It is important each individual knows the effect of the terms and conditions and if this is acceptable and whether it suits their lifestyle and family arrangements.
I always remind anyone thinking about Equity Release, that one of the most important things to do before signing up to an Equity Release plan is to seek independent financial advice about the product.
With regard to Inheritance Tax I shall discuss that briefly now, as it all depends on individual circumstances, but the main points of consideration are;
When it comes to Equity Release and the affect it may have on Inheritance Tax, any benefit derived from such an agreement should be as a consequence and not the pure motivation to enter into such an agreement.
The Equity Release product works by releasing equity in your home by way of a loan to you, with added interest at the rate agreed in the terms. Thus providing the owner with a source of income or capital which was otherwise tied up.
A possible downside to Equity Release may be the rate of interest applicable to the loan and whether this is set at a high rate. In addition, whether the loan value itself is reflective of the true market value of the property.
Once the loan is agreed it will be secured against your home and is usually only repayable after you pass away.
Equity Release may have the potential to reduce the assets you own at death, as the value of your equity in the home is reduced, because there is a secure loan against it. So although it would not affect the open market value, it would affect the net profit the owner may take upon sale and therefore the value which would be included in your estate for Inheritance Tax purposes.
However, an important point to bear in mind is, if the cash you have received from the loan is in your bank account, this will be included in your assets upon your death and would not therefore take the value outside of your estate for Inheritance tax purposes.
An alternative to Equity Release may be downsizing, or something else altogether. Therefore, it is sensible to ensure you explore all of the options available before committing to anything secured against your home to make sure you have the right solution for your circumstances.
Victoria Davies, LL.B (Hons) TEP, Solicitor & Head of Private Client for Z group.
N.B. Please note we are not advising for or against Equity Release Schemes and suggest you seek independent financial advice before entering into such an agreement.