Use of Equity Release in IHT planning

[Bouncey]

Hello,

My wife and I are in the very fortunate position where IT will be a substantial liability for our children.

I view any of our personal spending as being at a 40% discount, £100 unspent will be taxed at 40%, when we die.

Neither of us gets at all excited by cars, jewellery, fancy restaurants, fancy clothes, and general ostentation although holidays are not neglected (at least in extra-covid times).

So, because it is difficult for us to spend money on ourselves, IT will be significant.

After 40 years in our C. London family home, where we wish to stay as long as possible, hopefully till death, it occurred to me that we could use Equity Release and distribute the cash to our children. I believe we could raise much more through Equity Release than just by remortgaging to the max? Yes, I know one of us needs to survive 7 years for it to work.

Now I know that Equity Release is expensive, but I'm thinking that surely the resulting 40% discount more than outweighs the expense?

I'd appreciate any opinions of on this line of thinking.
John

[CliffEdge]

We were quoted a fabulous equity release deal by nationwide building society which we didn't use in the end.

But that's another story. I would have used it but it wasn't solely my decision.

[DrFfybes]

An interesting line of thinking.

I have one thought that comes instantly to mind, is that if you do equity release then AIUI you can only claim RNRB relief on the amount you still 'own'. Not sure if the same applies to a regular mortgage, as that would be a secured loan.

I suspect as you are in London you could release quite a chunk of equity and still keep 'your' bit over the £350k though.

[edit] Once the estate hits £2m the RNRB is reduced anyway, however if you give away £500k the week before you die, then it does not count towards the RNRB reduction(!)

Paul

[Dod101]

Equity release always sounds potentially horribly expensive to me. At the very least you would surely need to discuss it with your heirs to see what they thought.

Presumably you have thought through the other options, such as simply giving away some money at the moment (of course if much of your estate is tied up in your property that option may not be available and may be the reason you are looking to equity release anyway)

You can reduce the IHT charge to 36% if you give away at least 10% of your net chargeable estate to charity. Depending on the numbers, the loss to the residual beneficiaries may not be much and you will feel better for benefiting your charities.

Dod

[genou]

There's a play the numbers calculator here https://www.legalandgeneral.com/adviser ... calculator which might give some food for thought.

[Bouncey]

Our three children, 33 37 and 40, have each already had a big helping hand with housing.

I'm not planning to touch my sipp, it's earmarked for them. So we are living on our capital (cash, Isa's and unsheltered equities). Once this capital is burnt through, we may have to dip into the sipp, depending on how long we live, amongst other factors.

[Kantwebefriends]

I'm not planning to touch my sipp, it's earmarked for them. So we are living on our capital (cash, Isa's and unsheltered equities). Once this capital is burnt through, we may have to dip into the sipp, depending on how long we live, amongst other factors.

Wouldn't that be the time to do an equity release rather than lose some SIPP? Though who knows how long the remarkable exemption of pension money from IHT will last?

Is this, though, perhaps the last opportunity to get a reasonably cheap equity release loan? Are interest rates going to increase for a few years?

Would a RIO (Retirement Interest Only) mortgage be a competitor for an equity release mortgage?

Or would you each like to gift part of your share of the house, up to £325k, into a Discretionary Trust with the pair of you as the founding Trustees of each trust? Each of you lists the beneficiaries as (i) children, (ii) grandchildren etc, (iii) the surviving spouse after the death of the settlor of the trust.

No interest to pay; you could always buy life insurance against the risk of dying within seven years. This must be a case for going for specialist advice. A STEP lawyer? Tax advisor? Financial Advisor? I might start with the first but I am an amateur in these matters.

[Bouncey]

<< Wouldn't that be the time to do an equity release rather than lose some SIPP?>>

Depending on investment growth, it might take 10-15 years to burn the capital. Much riskier with the PET at age 80-85 (I'm a healthy 68 years old, wife healthy 64)

<<Is this, though, perhaps the last opportunity to get a reasonably cheap equity release loan? Are interest rates going to increase for a few years?>

I agree!

<<Would a RIO (Retirement Interest Only) mortgage be a competitor for an equity release mortgage?>>

Indeed, but I believe that more would be released with an ER mortgage.

Thanks for the heads up on STEP practitioners

[TUK020]

Our three children, 33 37 and 40, have each already had a big helping hand with housing.

I'm not planning to touch my sipp, it's earmarked for them. So we are living on our capital (cash, Isa's and unsheltered equities). Once this capital is burnt through, we may have to dip into the sipp, depending on how long we live, amongst other factors.

One of the things you might want to consider:
If you do not have much taxable income, you should at least be drawing from your SIPP to the level of your income tax allowance.
This money could then be passed to your offspring as surplus income - split 3 ways this allowance would pretty much be on the limit for regular gifting and sidestep any future IHT.
If you didn't particularly want them to burn though it now, you could always reach agreement with them that they put it into their SIPPs - avoid tax at your end, allow them to recoup it at theirs.

[Bouncey]

<<you should at least be drawing from your SIPP to the level of your income tax allowance.>>

Most of the allowance is used up by my state pension.

[taken2often]

Trusts and gifting is a difficult area. Equity release for personal spending or big bills good if you do not have any family ( note I think a new law is coming out at all equity release deals must have a repayment clause to allow you to reduce the liability if you wish to do so.

I am now over 75 will not be drawing on my SIPP or my ISA. The income from my taxable account covers my needs and If I need more I would use this fund until empty. I also fund my ISA from this fund. Only when it is empty would I then switch on my ISA. At this moment the ISA income would cover all my needs.

PS if I was married the ISA can be transferred to a spouse and continue to pay out tax free.

[Lootman]

I am now over 75 will not be drawing on my SIPP or my ISA. The income from my taxable account covers my needs and If I need more I would use this fund until empty. I also fund my ISA from this fund. Only when it is empty would I then switch on my ISA. At this moment the ISA income would cover all my needs.

There is an argument to do the opposite i.e. spend down the ISA and let the taxable account grow. For two reasons:

1) You really cannot mitigate the potential IHT liability of the value of an ISA. (Unless you want to risk it all on qualifying AIM shares). To employ IHT-reduction strategies you first have to liquidate the ISA.

2) In a taxable account, the cost basis of all open positions is rebased upon death to the value at the time of the death, saving a lot of CGT.

[taken2often]

True but I am paying tax on the dividends I draw. If I needed more cash I have previous lossess to use up plus I would use the annual allowance. The only big thing that I have bought during the past two years was a car. Years ago I did start drawing some ISA income until I realised I was paying tax. You would be right if I was investing for growth instead of income.

Bob