Taking out equity release is a big decision. There’s a lot to consider, so understanding how equity may affect your tax, benefits or state pension is important, prior to committing to a plan. In this article, we’ll explore six different topics that we hope will answer any questions you may have.
Equity release will diminish the overall value of your estate, and reduce any potential inheritance tax (IHT) liability upon your passing. As you reduce your equity and/or cash, or release equity by converting it into cash and spend it for your own personal use, your estate’s overall value may decrease, and after the Potentially Exempt Transfer (PET) Rule of 7 years has passed, there may be less inheritance tax to pay under current UK legislation. Professional IHT tax advice should be sought on this subject from a specialist before using equity release for this sole purpose. However, passing wealth into the family by releasing equity can also have the result of reducing IHT whilst retaining wealth in the family, again providing the PET period had passed.
Equity release is not subject to income tax since it is classified as a loan, and therefore, it isn’t considered as ‘income.’ Even if you intend to use equity release to supplement your income, no taxation will apply.
If your eligibility for benefits relies on your income and savings being means-tested, taking out equity release could impact your qualification. Normally, the funds obtained through equity release are not classed as income, since they constitute a loan. Non means tested benefits are not affected by releasing equity from your property.
The release of equity does not hold any bearing on your eligibility for a State Pension, as it is not a means-tested benefit.
Likewise, private pensions will remain unaffected. Nonetheless, if you are receiving Pension Credit, the Guarantee Credit component might be impacted when you release equity from your home. An equity release advisor will help you to understand whether equity release will affect you, based on the current benefits you’re receiving, and what the impacts will be.
Interest on a lifetime mortgage will be charged on your equity release loan by your lender. They will compute it on a daily basis and it is your choice whether you pay the monthly interest amount to keep the amount borrowed the same for the life of the loan. Or you can have no monthly payments and let it compound up which will increase the initial amount borrowed through compounding of interest . It is important to note that the interest rates for equity release can differ significantly so it is important to have advice from a specialist. You can also make voluntary repayments on some plans to reduce the amount of interest that compounds up and retain more equity in your property. .
With a lifetime mortgage equity release plan, the amount owed, whether it was just the initial amount borrowed, or if no monthly payments are made, the final amount with interest added that was compounded, will be taken on the day the property is sold. This is usually when the last survivor in the property passes away or they go into long term care.
Your equity release plan will conclude when it is repaid, following death or entry into long term care of the last home owner.
For further information, please contact us on 0808 169 8316. Alternatively, you can request a callback by a customer services representative, or request a brochure, by sending us an email, completing our web site form, or message us through the live chat on our website.
