Estate planning: Equity release and inheritance tax

Equity release and inheritance tax case study

Paul and Margaret Evans are a retired couple in their late 70s. They own a valuable property worth £1.2 million and have savings and investments worth £800,000. They have two children and wish to minimise the impact of inheritance tax on their estate, while ensuring they have sufficient funds for their retirement.

Client objectives: Paul and Margaret Evans wish to reduce their potential inheritance tax liability and maximise the amount they can pass on to their children. They also want to maintain their current standard of living and have the flexibility to access additional funds if needed.

Strategy: To achieve their objectives, Paul and Margaret decide to explore the option of equity release as a part of their inheritance tax planning. Equity release allows them to release a portion of the value tied up in their property while continuing to live in it.

Recommendation and Implementation:

Initial Meeting: Paul and Margaret discuss with Toni Chalmers-Smith, their financial adviser at Tees Wealth, inheritance tax planning and equity release. Toni assesses their financial situation, including their property value, savings and investments, and determines the potential inheritance tax liability.

Equity Release Option: After reviewing Paul and Margaret’s financial situation, Toni recommends a lifetime mortgage as the most suitable equity release option. A lifetime mortgage allows them to borrow against the value of their property, either as a lump sum or in smaller amounts over time.

Loan Amount and Interest Rates: Toni calculates the loan amount Paul and Margaret can release based on their age, property value, and health conditions. They also discuss the interest rates, repayment options, and implications for their estate.

Estate Protection: To ensure that the inheritance for their children is maximised, Paul and Margaret decide to opt for an interest roll-up plan. This means they won't make regular interest payments, and the interest will be added to the loan balance. The loan, including the accumulated interest, will be repaid upon their death or if they move into long-term care.

Inheritance Tax Planning: By releasing a portion of their property's value, Paul and Margaret can use the funds to make gifts to their children, reducing the overall value of their estate. They consult with a solicitor at Tees to ensure the gifts are structured appropriately within the inheritance tax rules and exemptions.

Ongoing Review: Paul and Margaret maintain regular contact with Toni and their solicitor to review their estate planning strategy and make adjustments as needed. They understand that changes in legislation or their personal circumstances may require modifications to their inheritance tax planning approach.

Outcome: By utilising equity release for inheritance tax planning, Paul and Margaret achieve several objectives:

Inheritance Tax Savings: By gifting a portion of the released equity to their children, Paul and Margaret effectively reduce the value of their estate, potentially resulting in significant inheritance tax savings.

Retained Standard of Living: Paul and Margaret can access the released funds to maintain their current lifestyle, cover healthcare expenses, or enjoy travel and leisure activities during their retirement.

Flexibility: With an interest roll-up plan, Paul and Margaret have the flexibility to choose how and when they access the funds, whether as a lump sum or in smaller amounts over time with a drawdown facility. This provides them with financial security and peace of mind.

Legacy for Children: By reducing their inheritance tax liability and making gifts during their lifetime, Paul and Margaret can pass on a larger portion of their estate to their children, ensuring a more substantial financial legacy.

Important Considerations:

If you are releasing equity to gift money to another person, this will be exempt from IHT if you live for 7 years thereafter, and do not derive any direct or indirect benefit back.  However, if you die within 7 years of making the gift, it will be brought back into account with the rest of your estate when calculating the tax.

It's crucial to note that equity release, including lifetime mortgages, is a complex financial product. Mr and Mrs Evans sought professional advice from a qualified financial adviser and solicitor to ensure they understood the risks, costs, and implications of their chosen strategy. Everyone’s circumstances are unique, and it's important to consult with a specialist within this area of advice.

Tees is a trading name of Tees Financial Ltd, which is authorised & regulated by the Financial Conduct Authority, Registered in England, and Wales number 4342506.

Tees is a trading name of Stanley Tee LLP regulated by the Solicitors Regulation Authority, Registered in England in England, and Wales number OC327874.

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But we can help you wherever you are in England and Wales.

Chat to the Author, Toni Chalmers-Smith

Wealth Specialist, Wealth Management, Bishop's Stortford office

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Toni Chalmers-Smith, wealth specialist, Equity Release, later life planning
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