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.
Record numbers of families are falling into the inheritance tax net as the thresholds above which you are liable to pay tax have remained frozen since 2009.
Families paid £3.2 billion between April and August — an increase of £300 million on the same period last year.
A growing number of families are looking for ways to cut their bills. Some may be tempted to consider equity release, which is a way of tapping into the value of a property without selling it.
But independent financial adviser Andy Wilson warns that equity release is rarely a good option to reduce an inheritance tax bill, even though it can reduce the value of an estate.
Financial adviser Andy Wilson warns that equity release is rarely a good option to reduce an inheritance tax bill, even though it can reduce the value of an estate
For a homeowner whose estate is over the tax-free threshold, taking out equity release to reduce the value of an estate by £100,000 could potentially avoid a nasty 40 pc tax bill, saving £40,000 in tax.
But borrowing £100,000 on an equity release mortgage at the current average rate of 7.08 pc according to Moneyfacts, would result in interest of £98,000 over ten years, meaning the homeowner’s heirs would end up £58,000 worse off.
‘By withdrawing some of the value held in the main residence, a lifetime mortgage debt reduces the amount of equity remaining in your estate upon you death. This means your inheritance tax bill is likely to be lower,’ he says.
‘However, the potential reduction in the estate value has to be set against the high cost of borrowing, which over a long period could be costly.’
An individual can pass on £325,000 tax free, while a couple who is married or in a civil partnership can pass on a combined £650,000.
Money Mail has produced a new guide to equity release and later-life mortgages. Call 0808 239 4005 or visit mailfinance.co.uk/release for a free copy.
