17th December 2024

Inheritance Tax and Equity Release – Part 2

In part 1, we discussed what Equity Release is and how it can be teamed with Inheritance Tax planning to reduce the Inheritance Tax payable upon death. Click here to read part 1.

 

Equity Release and Gifting

Equity Release coupled with gifting can effectively decrease the amount of Inheritance Tax payable by beneficiaries. That becomes even more critical when an asset class which was previously outside the Inheritance Tax net (your pension) will be brought into the tax net for Inheritance Tax calculation purposes on death should you die after 6 April 2027.

Gifting has always been a powerful method for reducing Inheritance Tax liabilities especially when it is more likely than not that the donor will outlive the Revenue’s seven-year rule.  This may mean, that if one is already elderly or one has already poor health that the impact upon the recipients of you not surviving seven years or not even surviving three years should be considered.

One could, instead, look to take a more gradual approach to preserve the value of one’s ordinary Nil Rate Band allowance. One could make annual gifts of the annual gift threshold amount of £3,000. With a married couple that doubles to £6,000.

 

Why Gifting Could Be a Risk

It may be the case that you do not feel particularly comfortable with releasing significant amounts of cash to a child or children.

One very good reason might be that if one or more of your children were to subsequently be involved in divorce proceedings leading to the end of their marriage or civil partnership, then the gifted funds could well be on the table when it comes to that divorce settlement and that could mean assets passing somewhere you do not wish them to pass.  If that is a significant risk, then the direct gifting of Equity Release funds represents a significant risk and is not appropriate.

Even if a child does not have that risk, if they are at risk of some form of bankruptcy perhaps, they are a professional having potential professional negligence matters impacting upon them in the future, then again, a direct gift may not be appropriate. You also may feel that a direct gift might engender feelings of entitlement from the recipient or, if one child has been favoured by gifting and others have not, that may set up family tension which may manifest itself in the future in family disharmony and/or a contested probate.

 

Equity Release and Trusts

In some instances, it can be helpful to team Equity Release with the setting up of a Trust or Trusts by the homeowners. Those Trusts will be such that the homeowner and their spouse/civil partner cannot receive benefit in any circumstances, but the homeowner and spouse may remain as the Trustees for a class of beneficiaries, excluding themselves but including children/grandchildren etc.

The decision as far as when the Trust pays out and to whom can appropriately be left to the Trustees to make, preserving a degree of flexibility and control for the homeowner settlors. It may be that the homeowners want to use a Trust to benefit grandchildren in time and the settlors may wish to take a medium to long term investment view on where the Trusts monies are deployed. It might also be the case that income or capital subsequently arising can be structured so it is tax efficient for the ultimate recipients, particularly if the grandchildren are underage and/or are not working or are in some form of education. The trust provision may allow the use of otherwise wasted Income Tax personal allowances.

Hitherto, much Inheritance Tax planning has steered clear of using the family home as the asset and that is usually been because of concerns as far as security of tenure for the homeowners etc.  That remains, to an extent, still relevant.

 

Pensions

Equity Release and Inheritance Tax planning, when teamed together, are a good solution; particularly where there are plenty of other assets which are less attractive from a taxation viewpoint to plan with.

From what we understand, it may be very difficult to plan with pensions post April 2027 than has been the case beforehand, and it may be that homeowners with substantial money purchase pensions may decide to draw on those pensions rather than leaving them, as has been the case previously.

The use of a pension as a pension will decrease the value of the pension over time.  But a reasonable pension does mean, however, that if the homeowner needs long term care and sells the family home and the Equity Release must be repaid at that point in time, there is still an adequate funding mechanism from a combination of the pension and the remainder of the sale proceeds after the Equity Release provider has been repaid.

Planning with a family home may also be sensible way of planning if the family home is large and there may be other investments, such as stocks and shares which are standing at significant value. Encashment of those assets would give rise to a lifetime Capital Gains Tax  which may be unpalatable. This is less the case when it comes to ISA shielded assets etc, but often ISA shielded assets will be being used to pay tax free income.  So whilst an ISA portfolio could easily and in a tax efficient manner be passed to the next generation, the reality may well be that the current owners may require the income or the ability to use the income in the future for themselves. For such individuals, Equity Release teamed with gifting or putting into Trust maybe more appropriate.

 

This is a highly nuanced area both for financial planning and indeed Inheritance Tax planning. Here at Buss Murton Law, we have legal experts with experience in the mechanics of Equity Release from a conveyancing viewpoint and a Will Trusts and Probate viewpoint.

For further information please contact a member of our team on 01892 510 222 or email info@bussmurton.co.uk

Edward Walter

Edward Walter
Partner