Page last updated – 5th March 2023

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Chris - Equity Release Editor

Equity Release and Inheritance.

Equity release and inheritance are two important financial concepts that homeowners should understand.

Equity release allows homeowners to access the value of their home without having to sell it, while inheritance refers to the assets and property that are passed down to your heirs after you die.

While equity release can provide a source of income in retirement, it can also impact your ability to leave an inheritance to your loved ones.

In this post, we’ll explain how equity release affects your inheritance and provide relevant data, expert insights, and strategies to help you make an informed decision.

If you want to learn more about equity release and how it works, we’ve put together a comprehensive guide on the topic. Our guide covers the different types of equity release, eligibility requirements, and more. It’s a great starting point if you’re considering equity release as an option to supplement your retirement income.

How does equity release affect inheritance?

Equity release can impact your ability to leave an inheritance to your loved ones. If you take out a lifetime mortgage, the interest on the loan will accrue over time and reduce the value of your estate. Similarly, if you sell a portion of your home through a home reversion plan, your heirs will only inherit the remaining portion of the property.

According to the Equity Release Council’s Q4 2022 Market Report, the average amount released through equity release was £91,878. The average age of equity release customers was 70 years old, and 69% of them were couples. Additionally, 82% of equity release customers have plans to leave an inheritance.

However, it’s important to consider the potential impact on your inheritance when deciding whether to pursue equity release. If you take out a lifetime mortgage, the interest on the loan can accumulate rapidly, reducing the value of your estate. For example, if you take out a lifetime mortgage of £50,000 at an interest rate of 5%, the amount owed would double to £100,000 after approximately 14 years.

It’s important to understand the tax implications of inheriting assets, as some assets may be subject to inheritance tax. In the UK, the inheritance tax threshold is currently £325,000, but this may vary depending on your circumstances.

We spoke with John Bunker, a financial adviser with over 20 years of experience in the equity release industry, to get his insights on the relationship between equity release and inheritance.

According to Bunker,

“Equity release can be a viable option for homeowners who are asset-rich but cash-poor, and who want to supplement their retirement income or fund home improvements. However, it’s important to understand the impact on your inheritance.”

Bunker recommends that homeowners who are considering equity release should work with a qualified financial adviser who can help them understand the risks and benefits involved.

“A good adviser will help you understand how much equity you can release, what the interest rates are, and what the impact will be on your inheritance,” he said.

Equity release can have an impact on your eligibility for means-tested benefits, so it’s important to understand the potential implications before making a decision. Our guide to equity release and benefits provides a comprehensive overview of the different types of benefits, eligibility criteria, and how equity release can affect your entitlement. 

Strategies for Balancing Equity Release and Inheritance

If you’re a homeowner who wants to release equity but is concerned about leaving a reduced inheritance, there are several strategies you can consider:

Consider a drawdown lifetime mortgage

A drawdown lifetime mortgage allows you to release equity from your home in smaller amounts over time, rather than in a lump sum. This can help reduce the impact on your inheritance by limiting the amount of interest that accrues over time.

With a drawdown lifetime mortgage, you can release the amount of equity you need when you need it, rather than taking out a lump sum all at once.

Example

John wants to release some equity from his home to supplement his retirement income, but he is also concerned about the impact on his inheritance for his children.

He decides to take out a drawdown lifetime mortgage so that he can release the equity he needs gradually over time. John initially releases a smaller amount of equity to cover his immediate expenses, such as home improvements and rising energy bills.

Later on, he releases additional equity as needed to cover his ongoing living expenses. By using a drawdown lifetime mortgage, John is able to balance his need for income in retirement with his desire to preserve his estate for his children.

Reduce the amount of equity you release

If you’re concerned about the impact on your inheritance, you can also consider releasing a smaller amount of equity. For a lump sum lifetime mortgage, releasing a smaller amount of equity would mean borrowing a lower amount of money from the lender, thus reducing the interest accrued over time.

This would also lead to a lower outstanding loan balance when the borrower passes away or moves into long-term care, potentially leaving more equity in the property for the borrower’s heirs.

Example

Let’s say John is 65 years old and owns a property worth £500,000.

He wants to release some equity to supplement his retirement income, but he’s also concerned about leaving an inheritance to his children.

If he takes out a lifetime mortgage and borrows £200,000, the interest will accrue on this amount over time, reducing the equity in his property. However, if he borrows a smaller amount of £100,000, the interest accrued will be lower, and there will be more equity left in the property for his children.

Downsize your home

Downsizing is a common strategy for homeowners who want to balance equity release with their inheritance. By moving to a smaller home, you can release some of the equity in your property and still have assets to pass down to your beneficiaries.

Downsizing can also reduce your living expenses and make it easier to maintain your home in retirement.

For example, if you currently live in a large family home but your children have moved out, you may consider downsizing to a smaller property. Let’s say you sell your current home for £500,000 and buy a smaller property for £250,000.

You could use the remaining £250,000 to supplement your retirement income or invest it to generate additional income.

Looking for the top equity release providers? Look no further than our page on the best equity release providers. We’ve done the research for you and have information on all the Equity Release Council member companies. Whether you’re looking for a lump sum or a drawdown plan, our page has everything you need to find the right provider for your needs.

Conclusion

Equity release can provide a source of income in retirement or help fund home improvements, but it can also impact your ability to leave an inheritance to your loved ones. By understanding the risks and benefits of equity release and exploring strategies to balance your desire for income in retirement with your desire to leave an inheritance, you can make an informed decision that meets your specific needs and goals.

Working with a financial adviser can help you understand the potential impact of equity release on your inheritance and develop a plan that balances your needs and goals.

Whether you choose a drawdown lifetime mortgage, reduce the amount of equity you release, downsize your home, or explore other options, careful planning and professional advice can help you achieve your financial objectives and ensure a secure future for you and your loved ones.