Is Equity Release Really Saving You on Inheritance Tax?

Equity release might seem like a good way to reduce your inheritance tax bill, but taking a closer look could make you rethink.

There’s been quite a buzz around inheritance tax recently. The number of families getting caught in the inheritance tax web has reached an all-time high. Why? Well, the limit above which people have to pay this tax hasn’t changed since 2009. To paint a clearer picture, families dished out a whopping £3.2 billion between April and August, which is £300 million more than the same months the previous year.

This surge has made many families cast about for ways to trim down their tax bills. One method catching attention is equity release. At first glance, it seems pretty neat; homeowners can access the cash tied up in their home without having to sell the property.

The Equity Release Appeal… and Its Pitfalls

Equity release might sound like a golden ticket for some. By releasing some of the value from their home, they can technically decrease their estate’s worth and, as a result, possibly owe less in inheritance tax.

But Andy Wilson, a financial expert with no vested interest in selling you on the idea, has raised a red flag. He suggests that while equity release can indeed lessen an estate’s value, it’s hardly ever the best way to tackle the inheritance tax monster.

Let’s break it down: Imagine a homeowner whose estate exceeds the tax-free limit. By using equity release, they might take out £100,000, hoping to dodge the 40% tax on that amount, which would save them a tidy sum of £40,000. Sounds good, right?

But here’s the catch. If they borrowed that £100,000 through equity release, with the current average interest rate hovering around 7.08%, the interest over ten years would rack up to £98,000. So, while they might’ve saved £40,000 in tax, their loved ones could end up with £58,000 less when inheriting. A bitter pill to swallow, right?

As Wilson puts it, “Taking out some of the value from your main residence means there’s less equity in your estate when you pass away, reducing the inheritance tax. But that potential saving is dwarfed by the hefty borrowing costs over time.”

The Current Inheritance Tax Landscape

Just to give you a quick recap: currently, any individual can pass on £325,000 without their heirs owing a penny in tax. For couples who are hitched or in a civil partnership, that figure doubles to a more generous £650,000.

In Conclusion

It’s only natural for homeowners to seek ways to ensure their loved ones get as much of their hard-earned wealth as possible. But, as the saying goes, “Look before you leap.” While equity release might seem like a viable solution to inheritance tax woes, the long-term costs could, ironically, leave heirs with far less. As always, it’s essential to crunch the numbers, get advice, and consider all options before making any financial decisions.