How equity release and inheritance tax can work in tandem

Many people take great joy in gifting or providing support to their family members whenever possible. Often, they wish to assist their family with significant financial endeavors, such as helping them buy their first home or covering the costs of university education. However, financial constraints can make this challenging.

Fairfield Finance has observed that many customers come to them believing they can only support their family financially after their passing. But in reality, this is not the case. Many customers find immense satisfaction in witnessing their family celebrate weddings, purchase new homes, enjoy family vacations, or lead a more stress-free life with financial support made possible through equity release.

How does inheritance tax impact monetary gifts?

Inheritance tax can be intricate, and it's advisable to seek expert guidance for specific inquiries. In essence, inheritance tax is levied on the total value of your estate, which includes the combination of all your assets (such as your home, savings, and investments) minus any outstanding loans or debts. Equity release can affect inheritance tax, as it's considered a liability in the overall debt calculation.

However, you can make a gift of money, property, or other assets exempt from inheritance tax (IHT) if the donor lives for at least seven years after making the gift. This concept is fundamental for anyone looking to pass on their wealth to the next generation, particularly if their estate exceeds the current IHT threshold.

Lifetime mortgages are frequently utilized to create a "living inheritance," passing wealth to the next generation when it's needed most, regardless of whether the estate is likely to be subject to inheritance tax upon the client's or their spouse's eventual passing. This approach is especially effective when there may be a future inheritance tax liability, and there's an opportunity to make use of potentially exempt transfers or chargeable lifetime transfers within the client's nil rate band.

One of the primary advantages of employing a lifetime mortgage strategy is that it releases funds for legacy planning. Simultaneously, the loan and accrued interest create a debt, which reduces the taxable value of the estate.

What's the next step?

If you find yourself in a situation where you wish to provide financial support while managing inheritance tax implications, it's recommended to discuss your plans with one an equity release specialist who will evaluate your requirements, including the amount you intend to gift and the size of your estate.

It's important to note that equity release is a regulated and advised product under the FCA. Therefore, it's crucial to consult with a financial adviser if you're considering releasing equity from your home to ensure you find the most suitable product.