The Question
I am a widow and I have three children and four grandchildren (at the moment) and I would like to gift some of the wealth tied up in the family home to them.
There are two reasons for this – my eldest children have families and want to buy a property and my youngest will need to get on the ladder at some point. Therefore I want them to have the cash now – so I can see them enjoy it, I don’t want them to wait till I die to fulfil their dreams.
But, here’s my one concern – will the gift still be liable for inheritance tax if I die in the next few years? And, if so, can I arrange for some equity to remain in my home to pay this in the event it might happen? Your advice would be gratefully received.
Mark’s Answer
Equity release is an increasingly popular way to provide a ‘living legacy’ for loved ones, as you can see them benefitting from some of your inheritance now, which can be very rewarding.
Any money you release (through equity release) is tax-free and yours to spend as you wish. There are no immediate tax implications of gifting large amount of money but there may be for the recipients of the money, depending on what they choose to do with it.
For example, if they were to make any income from the gift, it may be subject to Capital Gains Tax.
The current rules are that once your estate is worth more than £325,000, then it is subject to Inheritance Tax (IHT). You mention that you are a widower, but I don’t know if you have transferred your late husband’s allowance – which could boost the value of your estate to £650,000 before IHT becomes liable.
Whether the gifts to children and grandchildren are liable to IHT does indeed depend on how long you live for after these are made. If you were to take out equity release, make monetary gifts and then die within seven years, IHT would be payable.
After seven years, IHT isn’t payable on the gifts, and they are no longer considered part of your estate for IHT purposes. If you die within three years of the gifts being made, 40% tax is payable and between years three to year seven it is on a sliding scale, reducing annually.
Here’s a link to the Money Advice Service where you can read more about IHT and gifting.
There is a feature of equity release called Inheritance Protection Guarantee (IPG) – which ring fences a percentage of the value of your home – which your beneficiaries are then guaranteed to receive when you die or move into long term care (which is when your plan becomes repayable).
That said, IPG does reduce the amount you can borrow through equity release. For example, if you were to use IPG to ringfence £100,000 of the value of your home, the lender would then only consider lending on £300,000 (if your home is worth £400,000).
However, this feature of equity release does not help you with your estate planning and mitigating IHT as the total value of your estate is considered for IHT purposes – which will obviously include the money you have ringfenced for your beneficiaries through an Inheritance Protection Guarantee.
Estate planning is a complex subject, and you may require specialist tax advice to help you with this.
As a next step, I recommend that you speak to an adviser at Equity Release Supermarket so that we are better able to understand your financial situation and advise you accordingly.
Mark Gregory is founder and CEO of Equity Release Supermarket
You can read more of Mark’s advice on equity release here. If you would like to ask Mark a question about later life lending, including equity release, email our digital editor Kate Saines at kate.saines@emap.com
