May 19th, 2014

One of the realised values of using any London equity release scheme is the ability to gift inheritance early. Inheritance tax (IHT) is one of the largest discussions right now due to the £325,000 threshold. This threshold is much lower than most London property values, creating a difficult situation for larger estates. It is not the just the London homeowners who suffer from IHT, but actually the beneficiaries, as and when the bill comes to them. Equity release is a vehicle to use for lowering the end bill and also helping out your children now. This premise will be examined in detail along with the use of an enhanced lifetime mortgage calculator and some independent advice.

The Inheritance Tax
The threshold allows smaller estates to escape large tax bills. If estates are over the threshold of 325,000 GBP, then a rate of tax of 40 per cent can be charged. Some rates might be reduced to 36 per cent if more than 10 per cent is donated to a charity. In London, housing values are well over the threshold. The executor of the estate would need to pay the 40 per cent inheritance tax before the rest of the funds could be divided among the beneficiaries. It is often the Inheritance Tax Bill that causes larger estates to form trusts. Trusts pay out a certain amount per year rather than allowing the full amount. While tax is paid on the money, it is generally smaller than taking a lump sum. Inheritance Tax is always due six months after a person dies. Any longer than six months, and interest can apply to the sum due for Inheritance Tax.

How Equity Release Alleviates the Situation
Inheritance Tax is based on the total value of the estate. If a London equity release scheme is used to take out a lump sum of money from the equity coffers in the form of a lifetime mortgage, there is a loan to be paid. This loan will also have interest. The mortgage is not paid with monthly instalments like a traditional mortgage. Instead, no payment has to be made until the end of the person’s life or they decide to sell the home.

If you take out an equity release on your property that is 40 per cent of its value you are reducing the amount the estate is worth. For example, if all you have in retirement is your property which is £1.5 million in value and you take out an equity release against it for £250,000, live for another 30 years, and have interest at 6 per cent that sum is going to double every 11 to 12 years. So after 12 years of taking out the equity release you would now owe £500,000. In another 12 years the amount owed would be one million pounds. This equity release mortgage balance is then deducted from the overall asset value of the total estate. Obviously the larger this figure is the less IHT bill the individual will have.

In the example you can clearly see how the inheritance you leave behind at the end of your life can dwindle. The important factor is how you use the lump sum you received from the lifetime mortgage. Note this is just an example and you will want to use an enhanced lifetime mortgage calculator to determine the actual results.

Inheriting Cash Early
Cash from a London equity release mortgage can be spent on anything you wish. The lender may ask on the application form what the intended purposes are for, however this is for their own data purposes. You could take out money in an equity release scheme and gift it to your children. If you do so, or put it into trusts, then your children will not have to calculate the gift in the Inheritance Tax calculation at the end of the day. There is one caveat in that you must live for 7 years after you provided a gift of cash to your children. Living for 7 years or more after the gift means it is outside the estate and is no longer considered a part of the IHT calculation.

The entire sum taken out for the London equity release mortgage does not need to be gifted. You can use a portion of it too if you wish. Some of the top reasons to take out money are to help children, make home improvements for increased housing value, and to enjoy life without financial woes by repaying outstanding interest only mortgages, credit cards or personal loans.

Concerns with Lifetime Mortgages
The news can be filled with concerns, which is one reason Northern Ireland decided to conduct a study. Northern Ireland is behind the rest of the UK when it comes to equity release. The study, found at clearly shows that even Northern Ireland is less concerned with the consequences and wishes to obtain more equity release products. A main concern of lifetime mortgages is for the entire inheritance to disappear. An equity release calculator can help with this as a means of determining the amount you should take out to avoid huge IHT bills and yet leave an inheritance behind.