Equity release: How does it affect my Inheritance Tax bill?

British homeowners have already released equity worth £1.4 billion this year, research has found.

It comes as over 12,500 homeowners chose to use the built-up value in their property, an increase of 21.4 per cent on the first quarter of 2021.

Equity release appears to have grown in popularity in the UK, a likely consequence of homeowners wanting to make the most out of the increase in the value of their property over the past couple of years.

It can also help to lower any potential Inheritance Tax bills, a tax which many more people are likely to find themselves being liable to pay as the value of property has soared.

So, if you are considering releasing equity from your property, what are the tax implications?

Do I pay tax on equity release?

Any income received from equity release is not liable for tax.

Be aware that if you place it in a savings account, it will accrue interest, so be careful if you have borrowed a large amount to check if the interest earned will exceed your Personal Savings Allowance.

If you exceed this allowance, you will need to pay tax on the excess at your usual rate of income tax.

Equity release and Inheritance Tax

Equity release reduces the value of an estate you leave when you die so it can be used as a tool to reduce your Inheritance Tax bill.

Currently, there is no tax to pay if your estate has a value below £325,000, or if you leave your estate to a spouse/civil partner or charity when you die.

For estates worth more than £325,000, a rate of 40 per cent Inheritance Tax is liable on any amount above the threshold.

You can also use equity release to give a cash gift to loved ones. There is currently an Inheritance Tax exemption for gifts at an annual limit of £3,000.

Alongside this, you can also give £1,000 per person as a wedding gift, £5,000 to a child and £2,500 to a grandchild.

It should be noted that if you give gifts over £325,000 in the seven years preceding your death, the excess of the amount will be liable for Inheritance Tax.

With the value of property rising, many more people could find themselves falling into the eligibility for paying Inheritance Tax, therefore equity release could continue to grow as a way for people to minimise their bill.

Do you need advice on equity release or Inheritance Tax? For tax planning support, contact our team today.

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