Many people are lucky enough to own a house that has risen substantially in value over the years. Such people often find themselves incredibly asset rich, insofar as they have a lot of money tied up in their property. The problem is that selling their beloved home might not be a feasible option. For people like this, equity release can be a godsend, allowing them to have the liquid cash to live their life to the full.
Lifetime mortgage plans, the most common form of equity release, allow you to borrow against your home. Instead of making monthly repayments, the interest rolls up on a compound basis. The loan is repaid using your estate when you die.
However, equity release is not without its downsides. One of these is the risk that with higher interest lifetime mortgages, there is a chance that the value of the debt could grow to near or even exceed the total value of the home – leaving your relatives with a pittance.
This is because lifetime mortgages are available to those over 55. Rising life expectancies mean that many who take out lifetime mortgages earlier in life could find themselves living over 40 years with a lifetime mortgage.
There are a few ways you can reduce the risk that your financial legacy will be swallowed up by loan repayments. Here are a selection:
Renovate to boost your home’s value
You can actually use equity release to boost the value of your children’s inheritance by making smart renovations with the money you receive. Renovations can add sufficient value to your home that the value of your estate could be even greater with equity release than it would have been had you not taken out an equity release plan.
If property prices keep rising and you make renovations that homebuyers want, equity release can actually add a substantial value to the size of your estate.
Take out a plan that protects the value of your property
You can shield a portion of your home’s value from your equity release lender by taking out a scheme with ‘inheritance protection’. These plans leave a guaranteed amount to pass on to your loved ones when you die. The amount you can protect depends on the amount of equity you choose to release from the home.
Such plans typically allow you to release half of the maximum value for equity release borrowing. For instance, a home worth £500,000 should allow you to release equity from your property up to about 35%, in this case £175,000. Half of your property’s total value, however, would be protected from equity release payments. Following the example, you’d pass on a guaranteed £250,000 when you die.
Using gifts to avoid inheritance tax
Any money given away as a gift over seven years before you die is free from inheritance tax. If you’re in good health, you could actually use equity release to lessen the amount of inheritance tax you pay and pass it on to a loved one who needs the money sooner rather than later. For example, you could use equity release to give money to a son or daughter towards a house deposit.
The risk is that you could die before the seven year time limit expires. Then the gift would be taxable at 40%, giving the recipient an unexpected tax bill when you pass away. This assumes your total estate exceeds the inheritance tax threshold.
Interested in knowing whether equity release is right for you? Why not get in touch with our expert team. We have advised many satisfied clients considering releasing equity from their homes. Give us a call on 0161 667 4456 to see how we can help you make the right choice.