Equity Release for Inheritance Tax Planning

Use Equity Release for Inheritance Tax Planning

• Personal Nil Rate Band £325k
• Property nil rate band £150k (2019-20), £175k )2020 onwards)
• Total per person will be £500,000 in 2020.  £1m for a couple.

Equity Release:  The new estate planning vehicle?

Equity Release Interest rate roll up at say 4.5% pa. Example: £1.5M house – release £0.5m gift to two children £250k each, they each then buy a home.

• 10 years (120mths) – value debt = £783,496
• 20 years ER (240mths) – value debt = £1,227,733
• 30 years ER (360mths) – value debt = £1,923,849

Saved Interest on Children’s Mortgages (assumes Interest Only mortgage) - £500k at say 3% pa (0.25% pm) =

• 10 years =£515,207
• 20 years = £910,377,
• 30 years = £1,288,421

+ House price inflation say 6%pa (based upon 5.83% pa compound average house price growth last 36 years).  Source Halifax House Price Index.

500k of property total value with growth may be worth:

• 10 years  =£894,439
• 20 years = £1,600.040
• 30 years = £2,862,274.

IN 20 YEARS

Value equity release debt = £1,227,733 - this could reduce inheritance tax bill (at 40%).  £1,227,733 X 40% = £491,093.

Children save interest payments by not having a mortgage (assumes Interest Only mortgage).  20 years = £910,377.

Children property value 20 years = £1,600,040.

SUMMARY AT YEAR 20: 

For a cost of £1,227,733 equity release debt.

Children have property worth = £1,600,040 + saved mortgage interest payments £910,377 + saved/reduced inheritance tax bill by £491,093

= TOTAL BENEFIT TO CHILDREN £3,001,510.

But debt £1,227,733 means £1,773,777 REAL WEALTH IMPROVEMENT.