There are several different ways that individuals can pass on their wealth to beneficiaries, prior to death, with this known as estate planning. A home is likely to be one of an individual’s largest assets and with smart financial planning could be utilised to potentially reduce the value of their estate on death and any eventual tax burden.

Equity release can be used for estate planning, not just as a solution for those needing extra capital or cashflow.

An increasing average life expectancy, coupled with many of the baby-boomer generation having much of their wealth invested in bricks and mortar, has resulted in many looking to unlock some of this as cash.

There are a range of circumstances, we are finding, where equity release can be considered as an appropriate solution, more frequently:-

• Those wishing to increase their income over and above what is provided from their pensions and/or savings products.
• A way of settling personal debts or repayment of an Interest Only mortgage.
• Providing a cash lump sum for a specific purpose, such as home improvements, a vehicle or a special holiday.
• Providing financial assistance to family who may be better served by having access to funds in the present, rather than on death at some point in the future.

Provided an individual’s personal financial needs are met and depending on their circumstances, equity release combined with gifting provides an opportunity to take more control of passing on inheritance and can reduce the eventual size of the estate once the homeowner passes away. That may mean a lower inheritance tax bill or even a reduction in the value of the estate below the nil rate band entirely.

Please note that if the individual does gift cash released and dies within 7 years of making the gift there may still be a liability to inheritance tax.

There are two very different types of equity release – a home reversion plan, and the increasingly popular lifetime mortgage which we will explore further.

A lifetime mortgage

With this increasingly popular method of equity release, value from your home is released by securing a loan against the property.

You still own your home, where you can continue to live until death or a permanent move into long-term care, at which point the sum borrowed plus rolled-up interest is payable. If borrowing jointly with a partner or spouse, the loan is repaid upon second death, or on admission to long-term care. Importantly – you also continue to benefit from any increase in the property’s value.

Lifetime mortgage requirements:

• Loan is based on value of the property and the age of the applicants.
• Youngest applicant must be at least 55 years old.
• Property must be in good condition and not have been flooded for at least 5 years.
• Freehold or Leasehold properties can be considered. Lease must generally be 160 years, less the age of the applicant.
• Property cannot be sheltered accommodation or Age Restricted.
• The property must be the main residence.
• No part of the property can be held in a Trust.
• The lender will insist on having a First charge over the property.

Common features of a Lifetime mortgage:

• Interest rate is normally fixed for the life of the loan.
• Loan can be used for a re-mortgage, or house purchase.
• The Solicitor instructed must be experienced and qualified in specifically dealing with Equity Release loans.
• Loans are flexible, with many lenders now allowing partial repayment, up to 10% of the outstanding loan every year.
• Lenders will insist on sale of property in event of death or going into long term care (only on second life, if joint life).
• Beware of high redemption penalties, anywhere from 10% in first 5 years, reducing to 3% in second 5 years, although it may also be possible to borrow on the basis of no early redemption charge/penalties.

Please note that Equity release is not appropriate for everyone, or in all circumstances. It is still a long-term commitment, also potentially affecting the next generation, but if significant equity is held in the family home and cash is required it may be worth considering. This type of loan should be discussed with Family members, before any application is submitted.

If you choose a mortgage with required payments during your lifetime then your home may be repossessed if you do not keep up with the payments.

Borrowing with a Lifetime Mortgage or Retirement Interest-Only Mortgage will reduce the value of your estate.

Receiving a cash lump sum may also affect your entitlement to means-tested benefits.

Think carefully before securing other debts against your home.

 

Please contact us if you wish to discuss whether equity release could be appropriate for your circumstances 0330 320 9280, email info@cravenstreeetwealth.com or complete our online enquiry form

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.

References to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of publication. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.

You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.