Equity release for tax saving purposes

ranike

Hi everyone.
Does anyone here know if taking equity out from a property just so as to reduce inheritance tax exposure is common practice?
I'm presently settling the assets of my parents estate and the inheritance tax exposure is jawdropping.
Like most people of their generation, they saved and never borrowed and so had 100% equity in their property.
Going through the probate process has made me aware of my own position and I would like to avoid repeating the same mistake.
Thanks.

MWT

You would have to balance the reduction in IHT vs the compound interest charge over your remaining lifespan, and don't forget the 7 year rule for potentially exempt transfers...

On a rough calculation if you survive the equity release and transfer of the money to your beneficiaries by more than 10 years or so you will pay more in interest than you would in IHT at current likely rates...

Of course your beneficiaries will have had the use of the money for that time as well, so that is a factor too, but it doesn't feel like a priority simply for IHT reduction... 

Mickey666

Interesting question.
I suppose the issue would be the 'efficiency' of equity release.  I only know the basic principles but I'm guessing that equity release deals are not that great so the question that needs to be asked is whether equity release would eventually 'cost' more or less than simply paying the IHT.

ranike

MWT/ Mickey. Thanks for your comments. 
I came across a post in a financial forum (below). This seems to make some sense to me,but then this isn't my field.
Your input good or bad would be appreciated.
Thanks

"For those over 60 who own their own house , today’s deals , with rates at 2.5% fixed for life, are a steal.
Having paid off the mortgage, most are unwilling to take a loan out on their house in later life.
These lifetime mortgages have in the past been a product to steer well clear of.
Today that has changed, simply because the FIXED interest rate charged is so low, that the effect of compounding the debt, takes 27 years to double, by which time you are likely to be dead, or your house has risen faster than the compounding debt.
The mortgage you take out requires NO repayments of any type , interest or capital ,till you die or move into a care home.
The also come with a guarantee that even if the loan value exceeded the house value you can still live in your house for ever.

These mortgages don’t even require proof that you can make the repayments because you don’t have to make any. !"

MWT

Nothing wrong with that statement, but it has nothing to do with efficiency vs IHT for inheritance planning.

Also the 2.5% rate would require a rather low percentage of equity released.

Thrugelmir

If house prices were to fall for a period. Then that 2.5% interest charge would look very different. 

ranike

MWT.
By " efficiency " you mean how good or bad the raised money is put to work ?
I would also have to avoid that money (asset) being part of my estate otherwise I'm not acheiving much.

MWT

ranike said:

MWT.
By " efficiency " you mean how good or bad the raised money is put to work ?
I would also have to avoid that money (asset) being part of my estate otherwise I'm not acheiving much.

Exactly, you started this thread asking about equity release as a way to reduce IHT exposure.

So you would release equity and then you'd have to distribute it to your beneficiaries and then survive for 7 years to put the distribution outside the reach of the Potentially Exempt Transfer (PET) rules.

That part is fine, and if you did indeed drop dead 7 years after the release you would have achieved a reduction in the IHT exposure of your estate.

The problem is that if you don't drop dead soon enough, the interest, even at 2.5% will compound to a point where after another 7 years your estate has lost more through interest than you gained by avoiding the IHT on the release.

At 3.5% interest you'd pass that point only 3 years after passing the point of safety for PET...

There are manny reasons why you might still want to do this as your beneficiaries would have the use of the money much earlier and you may derive some pleasure from seeing it put to good use while you were still alive, but as a tool for reducing IHT exposure it isn't a clear and useful choice for most people I'd suggest...

csgohan4

Would deprivation of assets come in to play as well? Should OP need state care in the future?

MWT

csgohan4 said:

Would deprivation of assets come in to play as well? Should OP need state care in the future?

It isn't a simple yes/no situation as it has much to do with the proximity of the gift and the need for care, as well as the state of health of the individual at the time, also intent,  but it is something to consider at least as a risk.

Also worth noting that it is always going to be raised as a risk during the advice phase of obtaining any Equity Release if a declared intention is to gift the proceeds to others. Similarly the advice will cover the impact on means tested benefits of significant cash reserves. 

ranike

Thank you MWT
The penny has finally dropped.
Much obliged.