How Equity Release Can Support Gifting and Estate Planning
In collaboration with Beresfords Accountants
For many homeowners, the rising value of property has significantly increased the size of their estate. While this can be positive, it also means some individuals may want to explore ways to pass on wealth more efficiently. Equity release offers a practical way to free up funds for gifting to family, helping loved ones sooner rather than later. This strategy can provide immediate financial support for family members, such as helping with house deposits or education costs, while allowing homeowners to witness the benefits during their lifetime.
Understanding Gifting and Equity Release
Equity release allows homeowners aged 55 and over to access tax-free cash tied up in their property while continuing to live in their home. This can be particularly useful for those who wish to gift money to family members or support their loved ones during their lifetime. By unlocking some of the equity built up over years of property ownership, individuals can provide meaningful financial support when it is needed most.
Reducing Estate Value Through Gifting
Money released through equity release is no longer considered part of your estate for inheritance tax (IHT) calculations if it is spent or gifted within the seven-year rule. Gifting money to family early can help reduce the overall size of the estate, potentially lessening future tax implications. However, this should not be the primary motivation, as compound interest on the loan may offset potential savings over time.
Additionally, gifting during your lifetime can offer more than just financial benefits. It can provide peace of mind, strengthen family bonds, and help loved ones achieve important life goals without the uncertainty of inheritance.
Case Study
John and Mary, both 70, released £100,000 from their home and gifted £50,000 to their children. If they lived more than seven years, they would avoid potential IHT on the gifted amount. However, the impact of compounding interest on the remaining funds means it is important to consider the long-term financial effects.
In this scenario, it is essential to evaluate whether the emotional and practical benefits of gifting now outweigh the potential cost of compounded interest. Equity release should not be viewed purely as a tax mitigation strategy but as part of a holistic approach to estate planning.
Considerations Before Taking Equity Release
While equity release can support estate planning through gifting, it’s important to weigh the pros and cons:
Pros:
- No Monthly Repayments: Lifetime mortgages (a popular form of equity release) don’t require monthly repayments, with the loan repaid from the property’s sale when you pass away or move into care.
- Tax-Free Cash: The money you release is tax-free and can be used as you choose.
- Support Family Sooner: Helps loved ones with house deposits or life milestones earlier.
Cons:
- Interest Rolls Up: Interest accumulates over time, potentially reducing the value of your estate significantly.
- Impact on Benefits: If you receive means-tested benefits, equity release could affect eligibility.
- Compound Interest Risks: Over long periods, compounding can significantly increase the debt, potentially offsetting any IHT savings.
- Policy Changes: Future changes to IHT regulations or thresholds could impact the effectiveness of this strategy.
Navigating Uncertainty in IHT Regulations
Inheritance tax rules are subject to change, and there is ongoing speculation about potential increases to thresholds or even the abolition of IHT. While we can only base decisions on current legislation, it is crucial to acknowledge these risks when considering equity release as part of a broader financial strategy.
Additionally, there is no guarantee that equity release will leave more for beneficiaries. Rising interest and changing tax rules can alter the outcome significantly. This makes it essential to seek professional advice to ensure the decision aligns with your overall financial goals.
Get Expert Advice for Informed Decisions
Equity release is a major financial decision that should be carefully considered with professional guidance. At Prospect Tree Mortgages, we work closely with Beresford’s Accountants to ensure our clients receive tailored financial advice. By understanding both the benefits and risks, including the impact of compound interest and possible policy changes, homeowners can make informed choices that best support their family’s financial future.
If you are exploring ways to support your family financially or reduce the size of your estate through gifting, speaking with a mortgage and tax specialist is essential. Get in touch today to explore how equity release could fit into your broader financial and estate planning strategy.
A Lifetime Mortgage will reduce the value of your estate and may affect your entitlement to means-tested benefits and tax status. The impact of not servicing monthly interest payments on a Lifetime Mortgage is that the outstanding debt can grow rapidly, thus reducing the value of your estate.
For example, if the interest rate was 7% a year, a £50,000 loan would double to £100,000 after 10 years assuming no repayments are made. This is an example for illustrative purposes only and personalised advice and recommendations should be sought from a qualified professional.
You are strongly advised to register a lasting power of attorney. This will allow your affairs to be managed by somebody else if your mental abilities significantly decline. Think carefully before securing other debts against your home. Consolidating debt may reduce your outgoings now, but you may end up paying more overall.
Your home may be repossessed if you do not keep up repayments on your mortgage. the information contained within was correct at the time of publication but is subject to change, 27.03.2025.
What’s Next?
If you’re thinking about moving home, remortgaging, or buying your first property, now is a great time to review your mortgage options. At Prospect Tree Mortgages, we’re here to help you understand your choices and find the best mortgage for your situation.
Get in touch with our expert advisors today to discuss how this base rate cut could benefit you. We aim to ensure you make the most of the opportunities available.
Call us at 0800 8620 840 or visit our website at www.ptmortgagesltd.co.uk to learn more.
If you’d like to learn more about mortgage products and how we can help you, please don’t hesitate to get in touch with our team. We’re here to help you navigate the ever-evolving world of mortgages and guide you toward a brighter, greener home.