Equity release is not a new concept, but it has been growing in popularity over recent years. Many homeowners are looking for ways to avoid selling their houses and downsizing into smaller accommodation.
However, such an option comes at a cost, and those considering it should be aware that there will be inheritance tax payable on the amount released.
This article discusses how much inheritance tax you can expect on an equity release scheme and what factors you must consider when deciding whether this type of plan is right for you.
Who Pays Inheritance Tax?
Inheritance tax is payable by the individual receiving money or property left behind when somebody dies. To figure out if you will be liable for inheritance tax on an equity release scheme, it’s important to know whether or not you’re in this category and which threshold applies to your situation.
Whether or not you pay inheritance tax depends on several factors such as:
- The value of any assets held outside an ISA1
- Your relationship with the person who has passed away
- The value of assets held inside an ISA
In practice, this means that inheritance tax may not be payable by many people for several reasons, such as where pension income is being released, but no other assets are involved.
It’s also worth noting that the threshold has been set relatively high at £325,000 since 2009, and there were plans to lower it to £250K when 2015/16 financial year figures came in.
However, due to market fluctuations during 2016, Chancellor2 decided against making any changes until 2019, when he will review this figure again.
What Is a Beneficiary?
An individual who inherits property after someone has passed away is considered a beneficiary3.
If you’re named as one of these on a will, this means that if the deceased had any assets or money in their name when they died, then you could end up having to pay inheritance tax on them depending on which threshold applies and how much has been left behind.
However, it’s worth noting that not all beneficiaries have to pay inheritance tax4. There are many ways to pass on assets without having to pay this tax.
If you want more information about how inheritance tax works, you should speak with an accountant who can explain your options in detail and help you decide whether or not equity release is the best way to arrange things.
The Amount of Inheritance Tax Will Depend On:
- The age of the beneficiary
- The type of assets involved
- How they are left behind
If someone leaves you money or property when they die, it’s important to know whether inheritance tax will be payable and how much this could end up being.
There is no set rate for this as it depends on several factors, such as your relationship with that person and the value of any assets held outside an ISA.
However, even if other people can claim their share first before you have to pay anything, you may still need to consider what effect equity release might have on your financial situation now and in future years.
It’s also worth noting that some schemes offer fixed, so there won’t be any surprises when you get your statement.
As equity release schemes are available on various terms, it’s important to speak with an advisor who can explain the process in some detail and ensure that any plan you choose is right for your circumstances.
They will also be able to talk about inheritance tax thresholds5 and whether or not this type of scheme could work out as the best option for everyone involved if someone has passed away recently.
As there are no set rates where inheritance tax is concerned, only one person may have to pay this depending on their assets at death.
In contrast, others might use other options such as trusts instead, meaning they don’t need to worry about paying anything towards their estate after passing away either.
How Could Equity Release Affect Inheritance Tax?
As mentioned above, the amount of inheritance tax payable will depend on several factors, and you should speak with an accountant about your options before taking any action.
However, if this needs to be arranged as soon as possible, then equity release might not affect inheritance tax at all, given how much can be released from these schemes6 in certain circumstances.
In such cases, there may still come the point when people want to use assets7 they own or have inherited rather than waiting until they pass away for them to become liable for taxation due to market fluctuations8, etc.
It’s also worth noting that this type of scheme could offer more flexibility than other methods, so if someone wants quick without having to face excessive refinance charges, this could be a good option to consider.
Using Equity Release for Gifting Assets
In some cases, people might want to use equity release schemes to gift assets before the end of their life.
This is because there are no charges attached, which means that they can do this without paying anything towards inheritance tax or making any changes in terms of who gets what after they have passed away.
However, none of these options should be entered into lightly, and you will need to speak with an advisor about how such a plan could work out given your circumstances so that it makes sense from both sides.
There might also come the point where someone needs equity release but doesn’t own enough property on their own outside those already owned by other members within the family etc.
A specific type of equity release plan called shared ownership could be the best solution in such cases.
What Happens if I Don’t Pay Inheritance Tax?
As mentioned above, there are no set rates for inheritance tax, and it’s not something you can pay in advance like other forms of taxation.
This means that if someone doesn’t own enough assets to warrant this type of payment, they may be able to get away without paying anything, which should act as some form of incentive9 given how much people worry about the state pension, etc.
However, it’s also worth noting that unpaid tax will incur interest, so unless these funds have been put into an ISA or similar allowance before passing away, the family members left behind could face severe penalties when trying to access any money held within a bank account after death too.
How Much Inheritance Tax Will I Have to Pay?
This is one of the most common questions that people ask about inheritance tax, and as there are no set rates, no one can give a definite answer.
As such, you will need to speak with an advisor who can look at your circumstances to provide some advice on how much you might have to pay depending on what assets were held by the person before passing away.
What Are the Other Costs Involved?
There will be some form of the cost involved if someone decides to use equity release to access funds before death. This can include valuation fees and legal costs, which are necessary for getting all documentation in order, so it’s important to find out exactly what these might be before taking any action.
Do I Have to Pay Inheritance Tax on Everything?
In most cases, inheritance tax is only applicable on certain types of assets, which means that there are some things you might be able to keep as long as they’re not subject to a specific inheritance tax allowance.
In such cases, the value of these items will influence how much someone needs to pay if their total holdings exceed this threshold, meaning it’s always worth finding out more information before making any decisions about what can and cannot be kept in a certain situation.
Can I Get a Tax Refund on Inheritance Tax?
In some cases, inheritance tax may be refunded as long as the person who has passed away was not domiciled in England and Wales. This is because those from Scotland are exempt from paying it, but people living here must pay tax on any capital or income they receive after death, even if this isn’t much at all.
You must know what to expect when it comes to your inheritance tax. Whether or not the deceased person owned an estate property, their death will trigger the transfer of wealth and potential inheritance taxes on any transfers made in satisfaction of a pecuniary legacy (a monetary gift).
The equitable interest may be taxed as a capital asset, although this is not always the case. If there are two equitable interests, then one will be treated as a separate capital asset and taxed accordingly.