RegulationJul 15 2015

Chancellor’s IHT change delivers blow to equity release

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Chancellor’s IHT change delivers blow to equity release

The chancellor confirmed the effective inheritance tax threshold at £1m, meaning the family home will be taken out of inheritance tax for all but the wealthiest. The government is also set to introduce an additional nil-rate band when a residence is passed on death to direct descendants.

Adrian Murphy, partner at Murphy Wealth, told FTAdviser that the changes work against the whole idea of equity release from an inheritance tax point of view, “although as far as I understand any proceeds from downsizing of property, as long as it is going to the next generation, are still covered by the new rules”.

He added: “I haven't seen anything that covers the proceeds of the equity release plus the net value of the property and how that might be treated.

“In our experience those who are likely to utilise equity release are unlikely to require the additional nil rate band anyway, but this may be different in the south of England.”

Mel Kenny, later life adviser at Radcliffe and Newlands, added the biggest aspects driving equity release have been to either pay off an interest-only mortgage or cover a shortfall in income, with any potential inheritance tax saving more of a side benefit.

Figures this week from over-55s finance specialist Key Retirement showed that retired homeowners cashed in more than £750m of property wealth in the first six months of the year.

Dean Mirfin, technical director at the firm, explained to FTAdviser that their research found few people see equity release as an inheritance tax planning tool.

“Gifting some or all of the money released accounted for 25 per cent, but was not cited as being for inheritance tax purposes, with only 1 per cent stating that was the reason.

“The process of gifting is very much about wanting to help the children/grandchildren now when they need it most rather than to mitigate inheritance tax.”

He added that with the roll up of interest on lifetime mortgages it is debatable, depending on the life the loan runs for, whether the estate, in terms of inheritance overall, is better off versus paying the tax at the time.

“For this reason we never promote in any way equity release as an inheritance tax solution. If a client gifts and as a result the bill is reduced it may well be more about the timing of the gift and death than a guaranteed outcome.”

A survey of more than 1,000 people in June for Investec Wealth and Investment found that the new IHT rules mean 21 per cent are planning to increase their reliance on a greater proportion of their non-pension assets for income to maintain the size of their pension pot.

Around 23 per cent said they would downsize property to free up equity from their home to preserve their pension pot for the next generation.

Nick Gartland, senior financial planning director at Investec Wealth and Investment, added: “Many of those who are fortunate to have built up a portfolio of savings and investments are turning to these ahead of their pension so the value of the latter can be preserved for the next generation.”

peter.walker@ft.com