How Does Equity Release Affect Inheritance?

Equity release is a financial solution that allows homeowners aged 55 and over to unlock the value tied up in their property without having to sell it. While this can provide a valuable source of income in later life, it also has significant implications for inheritance. In this article, we explore how equity release affects the assets you leave behind and what you can do to mitigate its impact.

Understanding Equity Release and Inheritance

When you take out an equity release plan, you are essentially borrowing against the value of your home. The most common forms of equity release are:

• Lifetime Mortgages – A loan secured against your home, with interest rolled up and repaid upon your death or when you move into long-term care.
• Home Reversion Plans – Selling a portion or all of your home to a provider in exchange for a lump sum or regular payments while retaining the right to live in the property.

Both options reduce the value of your estate, which means there will be less to pass on to your beneficiaries.

Key Ways Equity Release Affects Inheritance

1. Reduction in the Value of Your Estate

As equity release allows you to access money tied up in your property, the amount owed (including interest) increases over time. This means that the value of your estate is reduced, leaving a smaller inheritance for your loved ones.

2. Impact of Compound Interest

With a lifetime mortgage, interest accrues over time, significantly increasing the total amount to be repaid. For example, if you release £50,000 at an interest rate of 6%, the debt could double in approximately 12 years, reducing the inheritance left for your beneficiaries.

3. No Negative Equity Guarantee

Many equity release products include a no negative equity guarantee, ensuring that you will never owe more than the value of your home. This protects your family from being responsible for any outstanding debt beyond the home’s sale price.

4. Inheritance Protection Options

Some equity release plans allow you to ring-fence a portion of your home’s value for inheritance. This ensures that a specific percentage of your property’s value is preserved for your heirs.

5. Early Repayment and Voluntary Payments

Some lenders offer flexible repayment options, allowing you to pay off interest or part of the loan early to reduce the final amount owed. This can help preserve more of your estate for inheritance purposes.

6. Tax Implications for Beneficiaries

Equity release can have indirect tax consequences. A reduced estate value may mean that your beneficiaries pay less inheritance tax (IHT) if the estate falls below the current IHT threshold of £325,000 (or £500,000 if passing to direct descendants and the property is included).

How to Minimise the Impact on Inheritance

• Consider Partial Repayments: Some plans allow you to pay off interest or part of the loan to control the final amount owed.
• Choose an Inheritance Protection Plan: Select a plan that allows you to safeguard a portion of your estate.
• Get Professional Advice: A financial adviser can help you choose the best equity release option to balance financial needs with inheritance goals.
• Explore Alternatives: Options such as downsizing or remortgaging may allow you to access funds while preserving more of your estate.

Conclusion

Equity release can provide financial freedom in later life but does impact the inheritance you leave behind. By understanding how it works, exploring protective options, and seeking professional advice, you can make an informed decision that balances your immediate needs with your long-term legacy.