The inheritance tax trap in equity release that could leave homeowners thousands worse off
- Record numbers of families are falling into the inheritance tax net
- Families paid £3.2bn between April and August, an increase of £300m
- Andy Wilson warns that equity release is rarely a good option for reducing tax burden
Homeowners considering an equity release to reduce inheritance tax are being urged to think twice as it could leave them thousands of pounds worse off.
Record numbers of families are falling into inheritance tax because the thresholds at which they become liable have been frozen since 2009.
Families paid £3.2bn between April and August – an increase of £300m compared to the same period last year.
Beware: Homeowners who use equity release to reduce their tax bill could actually end up worse off, a financial advisor has warned
More and more families are looking for ways to reduce their bills. Some may be tempted to consider equity release, a way to increase the value of a property without selling it.
However, independent financial adviser Andy Wilson warns that equity release is rarely a good option for reducing an inheritance tax burden, even though it can reduce the value of an estate.
For a homeowner whose estate is above the tax-free threshold, claiming equity relief to reduce the value of an estate by £100,000 could potentially avoid a nasty 40 per cent tax charge and save £40,000 in tax.
According to Moneyfacts, taking out £100,000 on an equity release mortgage at the current average interest rate of 7.08 per cent would result in interest of £98,000 over ten years, meaning the homeowner’s heirs would end up with £58,000 £ would be worse off.
Financial adviser Andy Wilson warns that equity release is rarely a good option for reducing an inheritance tax burden, although it can reduce the value of an estate
“By removing some of the value of your primary residence, a lifetime mortgage debt reduces the amount of equity that remains in your estate after your death.” “This means your inheritance tax bill is likely to be lower,” he says.
“However, the potential reduction in the value of the estate must be offset against the high cost of borrowing, which can be costly over a longer period of time.”
An individual can pass on £325,000 tax-free, while a married or civil partnership couple can pass on £650,000 together.
Money Mail has produced a new guide to equity release and later mortgages. Call 0808 239 4005, fill out the form below or request your free guide at mailfinance.co.uk/release.