Inheritance tax and equity release

you need to take professional advice.

Although Germanshepherdsmum may be able to give you some advice if/when she sees this thread

Do your sums.

When you die, what is owed on a lifetime mortgage - one that you make no lifetime repayments on - will reduce your estate for the purpose of calculating IHT but it can also end up taking a lot of the equity in your home.

At 80 you may be able to borrow as much as 50% of the value of your home.

The loan is repayable on death or sooner if you move to residential care. In that case, the loan is usually repayable within twelve months of the move. Be very careful about clauses in equity release agreements which give the loan company some say in whether you need care. They may decide that you don’t and can insist that the loan continues.

The equity release model is based on the loan lasting for as long as possible. Compound interest means that the loan increases in profitability for the lender each year it continues.

As you can see from the example that follows - the loan company would make an extra £365,000 if you were to live to 100 rather than 90.

At 5.5% compound interest, the best rate equity release rate available at the moment, if you borrowed say £300,000 and lived to 90 (or went into care at that age) you would owe over £510,000. If you lived to 100 (or went into care at that age) you would owe over £875,000.

You need advice from an independent financial advisor. You may be able to help family now and if you survive seven years reduce your inheritance tax bill, but the other side of the coin is that the debt will rapidly escalate because the interest is compounded. Another factor to consider is that the interest rate you would be charged would be high, as are all mortgage interest rates at present, and it is likely to remain at that rate until the equity release debt is paid when your house is sold - even though mortgage interest rates go down you will be stuck on a high rate. The likelihood is that mortgage interest rates will slowly reduce, so you have not chosen a very good moment to be considering this. A financial advisor can show you how the debt will grow over the years - I don’t know if you realise how quickly these debts escalate, to the point that you have little left and therefore downsizing is no longer an option.
You also need to remember that if you need care, money you have given away may be included in the financial assessment as though the gifts had not been made.

Cross posts TinSoldier. Your figures illustrate the reality of equity release. Nowadays it is not uncommon for someone not yet 80 to live for another 20-odd years. If I were the OP I would be wondering whether I loved my garden quite that much.

TinSoldier Do you have a similar chart that shows equity release borrowings on a house worth more like £150K by someone aged 90 with no family to leave the house to. A relative is in a similar situation. To me, the answer would be to get into rented retirement housing and sell the house to fund this until residential care is needed, then move as necessary. However, they too are very attached to their garden, plus they want to live independently while affording all the maintenance and repair bills.

There are some pleasant retirement flats local to them, but they all fail the "sitting in the garden" test (though I suspect that if it wasn't the garden, something else would be a deal breaker - any kind of "old people's flat" is immediately seen by them as "going into a home" with images of sitting in a room smelling of boiling cabbage and wet knickers while the TV blares unwatched)

They are intelligent but over-trusting, and generally very healthy. It wouldn't surprise me if they lived to 100 or more, and I don't want to see them going through all the value of their house and not having enough to be comfortable in extreme old age as a result. Or being "advised" by someone with a vested interest in signing them up!

https://www.gransnet.com/uploads/talk/202403/medium-565716-er-on-82-5k.png https://www.gransnet.com/uploads/talk/202403/medium-596159-er-drawn-down-2k.png https://www.gransnet.com/uploads/talk/202403/medium-918731-er-drawndown-extra-10k.png

Elegran The equity release market can be dangerous with plenty of evidence that people who call themselves financial advisors are salespeople working on commission, incentivised to push people to borrow more than necessary to meet their current needs

At age 90, one can usually borrow up to 55% on a lifetime mortgage - less if considered “medically enhanced”.

In theory, as your relative is in good health, she could borrow £82,500. Over ten years the debt would rise to £140,922 - see chart one. She could invest the £82,500 but in anything safe she would never earn as much interest as the debt she would be accumulating.

She would be better with a draw down plan that lets her take cash from her home as and when she needs it rather than in a single lump sum. That way she would only pay interest on the cash she’s taken. These plans are more cost-effective as the compound interest grows at a slower pace.

I believe, the minimum amount that someone can take up-front is usually £10,000, and the amount in reserve is often up to the maximum available. The minimum amount someone can draw on in future is usually £2,000 at a time.

With that in mind, chart two assumes she borrows an initial £10,000 and then another £2,000 in year three and every second year after. She borrows £18,000 over ten years and owes £27,612.

It’s quite easy to put these numbers into a spreadsheet. Once the inital formulae are set, you can play with the possibilities e.g say she needs to draw down more in year five to adapt her home - see chart three. She borrows £26,000 over ten years and owes £38,643.

If, by age 100, she needs to be in residential care, there will still be plenty of equity left in her home to self-fund.

I hope that helps.

Thank you, Tinsoldier That is very helpful.

Big thank you for examples. I was thinking of a maximum loan of £100,000, drawing it down when needed. I might consider paying back interest. As IHT is £120,000 it will reduce value of house by that amount. I am thinking very carefully and will get professional advice.
I am finding it difficult liberating the money as I am used to counting pennies, despite the house but would like to help family and friends. The warnings were useful.