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Equity Release Supermarket News Equity release and Inheritance Tax: how much might you have to pay?
Equity release and Inheritance Tax: how much might you have to pay?
Equity Release Supermarket News Equity release and Inheritance Tax: how much might you have to pay?
Equity Release & Inheritance Tax - How Much Might You Have To Pay

Equity release and Inheritance Tax: how much might you have to pay?

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Equity Release Supermarket
Checked for accuracy and updated on 03 April 2024

After a lifetime of building assets and increasing the value of your estate for your family, it could be a valuable legacy to leave for them when you die.

While it’s comforting to know that you’ve looked after your loved ones financially, there is also Inheritance Tax to think about.

To put it simply, Inheritance Tax is the tax that could be taken from a deceased person’s estate, which is then made payable to the government. In many cases, this tax could reduce the amount of inheritance your beneficiaries could stand to receive.

But how much could your estate expect to be taxed? And how could equity release affect this? Let’s find out.

Who pays Inheritance Tax?

Understanding the criteria behind Inheritance Tax is key to knowing whether your estate will be affected.

To start off, an individual can pass up to £325,000 on to beneficiaries without being taxed. This is called the Nil-Rate Band. Any amount above this threshold is subject to Inheritance Tax, which is charged at 40%.

If the estate is being passed to a spouse or registered civil partner, however, then the Nil-Rate Band does not apply. As long as they are UK residents, the bequeathed estate is exempt from Inheritance Tax – no matter the value. Additionally, any unused tax-free allowance is passed onto the surviving partner, meaning a married couple can pass on a combined £650,000 to their beneficiaries, tax-free.

The tricky part comes when you factor in the additional main residence allowance. This comes into play if you are passing on your main residence to a direct descendent, such as a child, stepchild or grandchild. For the 2019/20 tax year, this grants an additional £150,000 to your allowance, resulting in a total individual allowance of £475,000 per person. There is also the option to transfer this amount to a spouse or civil partner upon death.

Similarly, you should bear in mind that the allowance is set to rise to £175,000 in the 2020/21 tax year.

How could equity release affect Inheritance Tax?

If you have considered equity release, you will already be thinking about how you can use the funds to support your family and friends. But did you know it could also help to reduce the amount of Inheritance Tax that could be payable?

Whether through a lifetime mortgage or home reversion scheme, equity release takes some of the value tied up in your home and releases it back to you as cash. You can then use that money for whatever you wish – perhaps to renovate your home,  improve your standard of living in retirement or financially support your loved ones.

Sounds good, you might think, but how does this affect Inheritance Tax? In short, when you release equity from your property, you subsequently reduce the value of your estate. In some cases, this could take the value of your estate below the IHT threshold. The knock-on effect from this could therefore be a reduction in the amount of Inheritance Tax payable by your estate following your death.

Using equity release for gifting

Subject to early planning, you can gift your children as much money as you like while you are alive (this is called a Potentially Exempt Transfer). Luckily, the money from equity release counts as one of these gifts.

There are some rules you need to know, however. If you gift money from equity release and die within three years, then the gift will be charged at a 40% tax rate. Any gifts made three to seven years before your death will then be taxed on a “taper relief”. This is a sliding scale that decreases the tax rate as more time passes between the gift and your death.

For example, a gift made six to seven years before death will only be subject to a tax rate of 8%, compared to a 24% tax-rate for four to five years. In a nutshell, this means you are able to reduce the amount of Inheritance Tax your beneficiaries could have to pay, simply by planning your gifting carefully.

What should I do next?

If you’re considering using equity release as a means of reducing Inheritance Tax, this is a specialised area and, if you would like your inheritance tax position appraised, we recommend that you talk to an inheritance tax specialist. Alternatively, you can seek advice from a solicitor or accountant who specialises in the provision of this advice.

To find out more about equity release, get in touch with an Equity Release Specialist Adviser within the Supermarket team on Freephone 0800 802 1051, or by email at [email protected], for a free consultation.

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