If we again use the example of somebody who takes £100,000 from their property and is able to use it in a way that it no longer forms a part of their estate. Furthermore taking this money from the property brings the value of their estate below the inheritance tax threshold. It will now depend on when they die whether this has been a worthwhile exercise from the perspective of avoiding inheritance tax. The two examples below show how the transaction discussed in this paragraph can have significantly different outcomes depending of the date of death.
If we assume that the whole £100,000 released by the customer would have been subject to IHT at current rates. This means that if the customer had died before taking out the equity release loan, £40,000 would have been paid in inheritance tax. In the first example if we assume the customer died three years after taking the equity release loan then the amount of loan to be repaid is approximately £122,0000 – this being the original loan plus interest of £22,000. In this case it would have been an excellent way of avoiding or reducing inheritance tax. The customer and their family have had the full benefit of the £100,000 three years earlier and the cost of their debt is £22,000. This is a saving of £18,000 on the amount they would have had to pay in IHT.
The second example is a little more complicated and assumes the customer lives for a further 15 years after taking out the equity release loan. To keep it simple we will assume that even though the property value is likely to grow over the 15 year period and the IHT threshold could also increase, we will assume that the equity release debt keeps pace with them. In other words the underlying value of the estate doesn’t alter. After 15 years the amount that needs to be repaid to the equity release provider is approximately £250,000.
Again while the customer and family previously had the benefit of £100,000, the costs of the loan are now £150,000. While this debt brings the value of the estate below the IHT threshold, had the customer not used equity release then the inheritance tax that would have been paid on £250,000 at 40% would have been £100,000. In this scenario the estate is £50,000 worse off.
Please don’t take the examples above to indicate that equity release is a bad way to reduce your inheritance tax liabilities. The point we are really trying to make is that for this type of planning it is a bit of an imprecise tool. Equity Release has many useful features and benefits, many plans have an income drawdown facility which will allow you to take lump sums as and when you want them. This can help minimise the impact of rolled-up interest.
Our conclusions currently are that Equity Release is best used to solve a current potential problem rather than using it to try to control events that may be beyond your control. If you can take money out of your property now and put it to good use, then perhaps that should be good enough, if you end up beating the inheritance tax system too, well then that’s a bonus !