equity release vs inheritance tax
Discussion
Theoretical scenario. An elderly parent in a mortgage free property chooses to release equity and then offers to pay for your new roof and other expensive property improvements. I'm sure this is probably illegal? But has anyone looked at the sums for this kind of thing as I imagine it goes on all the time. I'm wondering how the reduction in the inheritance compares to the cost of the equity release. i.e let's say the inheritance were to be reduced by £100k, therefore the taxable amount would be significantly lower, compared to what the equity release company would get. Make sense??
It's certainly not illegal. However there will be significant costs for the equity release increasing as interest accrues over time and if the donor does not survive for 7 years after making the gift I think the gift would be added to their estate for IHT calculation purposes.
On this basis there would be no saving in Inheritance Tax assuming that the estate tipped over the (?) £325k limit and the downside would be the costs of the equity release.
On this basis there would be no saving in Inheritance Tax assuming that the estate tipped over the (?) £325k limit and the downside would be the costs of the equity release.
So it's likely the interest on the equity loan would be greater than the IHT saved if the person were to live for a further 7 years? The total inheritance could be as much as £1million and am I right in thinking the IHT is 40% of anything over £250K? I'm thinking there could be a tax bill of £300K, which would hurt!
The IHT threshold is £325k. Anything above that broadly is taxed at 40% with various exemptions for certain business and other assets which I do not know enough about to expand upon and anyway they may not be relevant in the circumstances you outline. You are broadly right in that I think if the donor survives for 7 years after making the gift then it would fall out of the estate (i.e. be excluded from the calculation). Again I don't know enough about the costs of equity release but 7 years interest at, say, 5% would tot up to 35% so if the financing costs were above 5% pa (and the first example I see from Googling "Equity Release Rates" is quoting 7%) then the IHT benefit may be wiped out by the costs incurred to free up the cash.
bernhund said:
Theoretical scenario. An elderly parent in a mortgage free property chooses to release equity and then offers to pay for your new roof and other expensive property improvements. I'm sure this is probably illegal?
Why would it be illegal?Equity release always seems like crap value though. Couldn't you get an interest only load secured on the property? Some advice needs to be taken to mitigate IHT if the estate is circa £1M.
Not illegal, the gift, for that is what it would be, would be a potentially exempt transfer. There are no limits to this.
Survive 7 years and no issue, if already fully gifted the nil rate, then taper relief could start to apply from year 3 onwards.
As long as the estate declares it no issue, remember the capital taxes office can go back through bank records etc far more than 7 years should they decide to investigate the estate.
You are effectively needing to look at an immediate 40% versus an interest rate on the amount taken out, roughly mortgage rates I'd imagine, or possibly a bit higher. Remember, most equity release are interest only and so the lending needs to be repaid as well, another potential IHT reducer if the funds are spent rather than lent/gifted.
Survive 7 years and no issue, if already fully gifted the nil rate, then taper relief could start to apply from year 3 onwards.
As long as the estate declares it no issue, remember the capital taxes office can go back through bank records etc far more than 7 years should they decide to investigate the estate.
You are effectively needing to look at an immediate 40% versus an interest rate on the amount taken out, roughly mortgage rates I'd imagine, or possibly a bit higher. Remember, most equity release are interest only and so the lending needs to be repaid as well, another potential IHT reducer if the funds are spent rather than lent/gifted.
not illegal but the maths need careful consideration.
Equity release is very viable in these situations and in addition to the tax implications you have to factor in that if the works need doing now it's a good way to advance the inheritance and 'potentially' avoid some IHT.
rates are more likely to be at the 6% mark. More expensive than standard loans but interest only are very thin on the ground and lenders are running from lending to the elderly.
Equity release is very viable in these situations and in addition to the tax implications you have to factor in that if the works need doing now it's a good way to advance the inheritance and 'potentially' avoid some IHT.
rates are more likely to be at the 6% mark. More expensive than standard loans but interest only are very thin on the ground and lenders are running from lending to the elderly.
Gassing Station | Finance | Top of Page | What's New | My Stuff