The inheritance tax trap in the release of capital that could leave thousands of owners worse off
- A record number of families are falling into net inheritance tax
- Families paid £3.2bn between April and August, an increase of £300m.
- Andy Wilson warns that equity release is rarely a good option to reduce the tax bill
Homeowners considering equity release to reduce inheritance tax bills are being urged to think twice as it could leave them thousands of pounds worse off.
A record number of families are falling into net inheritance tax as the thresholds above which they are required to pay tax remain frozen since 2009.
Families paid £3.2bn between April and August, an increase of £300m on the same period last year.
Beware: Homeowners who use equity release in a bid to reduce their tax bill may end up worse off, a financial adviser has warned
An increasing number of families are looking for ways to reduce their bills. Some may be tempted to consider equity release, which is a way to tap into the value of a property without selling it.
But independent financial adviser Andy Wilson warns that equity release is rarely a good option for reducing the inheritance tax bill, although it can reduce the value of an estate.
For a homeowner whose estate exceeds the tax-free threshold, undertaking an equity release to reduce the value of an estate by £100,000 could potentially avoid a nasty 40 per cent tax bill, saving £40,000 in tax.
But borrowing £100,000 on an equity release mortgage at the current average rate of 7.08 per cent, according to Moneyfacts, would result in interest of £98,000 over ten years, meaning the homeowner’s heirs would end up losing £58,000.
Financial adviser Andy Wilson warns that equity release is rarely a good option for reducing your inheritance tax bill, although it can reduce the value of an estate.
‘By withdrawing some of the value of your primary residence, a lifetime mortgage debt reduces the amount of equity remaining in your estate after your death. This means your inheritance tax bill is likely to be lower,” he says.
“However, the possible reduction in property value must be weighed against the high cost of borrowing, which over a long period could prove costly.”
An individual can transfer £325,000 tax-free, while a married or civil partnership couple can transfer a combined total of £650,000.
Money Mail has produced a new guide to equity release and mortgages for older people. Call 0808 239 4005, complete the form below or Claim your free guide at mailfinance.co.uk/release.