Where your estate (i.e. your total assets) exceeds your nil rate band of £325,000 (£650,000 for a married couple) and possibly the residence nil rate band of £125,000 (£250,000 for a married couple), the balance of your estate is currently subject to Inheritance Tax (IHT) at 40% on your demise.
For many people, their main residence forms a significant part of their estate and can be a hindrance to reducing the estate and consequently the IHT payable by your beneficiaries. It is not uncommon for people to want to remain in their own home, rather than moving and downsizing to release capital and take advantage of IHT planning strategies. A home often has many fond memories and a network of local friends and family whom you would ideally not wish to move away from.
In this scenario, one area which can be considered is Equity Release. This allows you to release an element of the equity in your home and gift this directly, or via a trust where you wish to retain a degree of control, to your family. If you have a requirement for additional income from the capital or wish to retain a degree of access to the capital itself, there are various types of trust which can be used. This type of planning can have the following benefits:
- The amount released, plus accrued interest, forms a debt against your estate, reducing any IHT liability. However, this might affect what you leave as an inheritance.
- Where the capital is gifted directly or via a trust, this will also fall out of your estate for IHT after seven years, or possibly earlier, depending on the type of trust used and the size of the gift.
Equity Release schemes offered by members of the Equity Release Council must adhere to a strict code of conduct designed to protect consumers. These safeguard's offer a "no negative equity guarantee", meaning consumers will never owe more than the value of the property. Interest rates must be either fixed or, if variable, with a cap fixed for the life of the loan. On top of this, they are protected by "security of tenure", which gives consumers the right to live in the home for life or until they need to move into long-term care. Lenders will expect you to keep your home in good condition within the framework of reasonable maintenance.
Equity Release is not suitable for everyone and it is for that reason that, if this is of interest to you, it is important to have access to good advice. Equity Release might affect your tax position and entitlement to means-tested benefits. Furthermore, an equity release mortgage with variable interest rates, as opposed to a fixed rate of interest, might not be suitable because the interest rate might increase significantly.
If you would like to know more about Equity Release, please let your Gerald Edelman contact know, or alternatively, contact Andrew Chaplin or Rob Jones at LGT Vestra LLP on 0203 207 8000 for an initial, no obligation exploratory discussion.