INHERITANCE TAX - 29.11.2012

IHT planning with home equity release

Despite the Taxman’s efforts, it’s still possible to use your home for Inheritance Tax planning. One option is to use an equity release scheme. This can be in the form of a loan or a sale and lease back. What are the pros and cons of each?

Asset rich

Having the largest part of your wealth tied up in your home is not uncommon these days, even with house prices having remained flat over the last few years. This was a situation faced by one of our subscribers who was trying to advise his parents on how to reduce their potential IHT bill.

Cash poor

Our subscriber’s parents’ home is worth around £850,000. A fairly decent amount, but their only other assets consisted of bank deposits and shares worth around £50,000. Assuming the value of their estate remains the same, the IHT payable on their death would be around £100,000.

Downsizing isn’t an option

Our subscriber’s parents are keen to reduce the possible IHT bill and the obvious way to do this would be to sell their house and downsize, but they’re adamant they won’t move. Another way to reduce the IHT bill was needed.

Tip. Ifour subscriber or one of his siblings was prepared to move in with their parents, they could make use of the co-owner exemption. This involves the parents giving a share of the property to the sibling living with them. Subject to a few conditions the value of the gifted property escapes IHT (see The next step).

Equity release

Circumstances mean that the co-owner tax break isn’t feasible for our subscriber’s parents and so he turned to look at equity release (ER) schemes. These might suit because his parents are in need of extra cash to cover the cost of running their home and day-to-day living expenses.

Lifetime mortgages

One version of ER involves borrowing against your property to release cash, this debt can then be knocked off the value of your estate when calculating IHT. Plus, unlike a house, you spend or give away the money you’ve borrowed which, of course, reduces the value of your estate for IHT purposes. The trouble with this type of arrangement is the amount of equity you can release can be fairly limited and usually you’ll have to make some payments against the mortgage. Any balance is payable from your estate when you die.

Home reversion schemes

This type of ER involves selling part or all of your house to an insurance company etc., for which they’ll pay you a lump sum and grant a lease allowing you to remain in the property for the rest of your life or until you sell it. Again, the cash can be spent or given away to reduce your estate. These schemes allow you to release up to 100% of your home’s value. The downside is you lose ownership of the proportion of the property you sell.

Which scheme? A lifetime mortgage can be used for almost any home, but usually releases less cash. Home reversion schemes are suited to higher value homes and larger estates where more cash is needed to meet living costs or give away to reduce IHT.

With loan schemes you retain ownership of your home, but they provide limited cash. This makes them suitable where the home doesn’t represent most of the value of an estate. Where this is the case a sale and lease back may be the better option as it can release more equity which may be spent or gifted to reduce your estate.

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