Is equity release an effective tool for transferring wealth?

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Scottish Widows
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Supported by
Scottish Widows
Is equity release an effective tool for transferring wealth?
Pexels/David McBee

IFAs Ricky Chan and Haresh Raghwani have reasoned that this is a helpful way to allow such clients to witness the joy of seeing their children or grandchildren benefit from their wealth in their lifetime. 

Chan, director and chartered financial planner at London-based IFS Wealth & Pensions, says: “Equity release can be used for intergenerational wealth transfers. This would be particularly useful for those asset-rich and cash-poor parents and grandparents living in high-value homes but do not wish to downsize or move. For those happy to downsize or move homes, they could simply release equity from the sale of their home.”

Raghwani, director and chartered financial planner at Berkshire-based Craufurd Hale Wealth Management, notes although equity release can also help pay off debts, make improvements to a home for later life, or top up income to live more comfortably, clients often use it as a way to help their family onto the property ladder. 

He adds: “Generally, those seeking equity release are cash poor and asset rich. With property prices increasing over the past few years, this has become an area of increased interest. I did a case for an individual who wanted to pass on his wealth while he was alive to help his two children onto the property ladder. His view was that his children can benefit now when they need the help.

“Young individuals are struggling to get on the property ladder and tend to rely on the bank of mum and dad. I believe using equity release for intergenerational planning will become more prominent.”

Interestingly, the recent Equity Release Revolution report by Key found that two out of three equity release customers say it has made a substantial difference to their quality of life, with 23 per cent claiming it has enabled them to support their family.

Data from the study showed that more than £32.6bn of property wealth has been released with 557,000 customers.

Will Hale, chief executive officer of Key, is keen to dispel the notion that equity release is something reserved for the super rich. 

He says: “If you talk about 'intergenerational wealth transfer', most people will assume it is something for the super rich rather than the ordinary man on the street. However, with a buoyant housing market, more and more over 55s are finding that the value accumulated in their home means that they can help younger family members sooner rather than later.

“Approximately 20 per cent of the proceeds of equity release is used for gifting and during the stamp duty holiday almost £1m of housing equity per day was taken out by the older generation to help children or grandchildren onto the property ladder. 

"With rates starting at just 2.8 per cent and features such as the ability to serve interest or repay capital mean that the products are extremely flexible. Over 55s who want help family members are better placed than ever before to benefit from these products.”

Potential problems

However, he adds that there are some pitfalls to consider, including potential tax implications.

Hale says: “Helping loved ones when they need it most can be a rewarding experience. However, with more than 700 products available and issues such as ensuring their own future financial security and potential tax implications due to the seven-year rule needing careful consideration, it is vital that those contemplating using their housing equity to make a gift seek specialist advice.”

Echoing his comments, Raghwani says there are some downfalls that clients must be aware of before considering equity release.

He explains: “Equity release can be used as a tool for intergenerational planning as long as the family understand the risks. The starting point is to establish if funds could be raised by other means, such as downsizing. Most individuals wish to remain in their family home, so downsizing is generally discarded. Equity release has a potential benefit of reducing inheritance tax as you create a debt against the property.”

He also adds that the debt could increase significantly over the years due to the roll up of interest as interest rates on equity release tend to be more than 4 per cent, and there are also early exit penalties for repaying the mortgage. 

Chan says that gifting money via equity release, in terms of IHT purposes, will be considered as a potentially exempt transfer so the usual seven-year rule still applies.

He adds: “The main benefit in gifting it this way is for this group of parents and grandparents to have the joy and satisfaction of seeing their children and grandchildren make use of this money during their lifetime, as opposed to them receiving the funds after they have passed away. Of course, if they were to then survive seven years after making the gift, then they could potentially reduce the IHT on their estate.”

However, on the plus side, an advantage is that many equity release products allow drawdown so that the homeowners can release only the equity they need at the time. He adds that this is subject to certain minimums, which means that they can phase the equity released over several years and only pay interest on the amount drawn down.

He also argues that the main caveat is that not only are set-up costs for equity release typically quite high, including product fees, financial and legal advice, but the interest on a lifetime mortgage could build up over their lifetime and negate any potential IHT saving. In addition, it could make moving homes quite difficult if circumstances change.

Despite this, Chan anticipates the continued rise in equity release being used for intergenerational wealth transfers: “I think demand for this will certainly increase as property prices have increased significantly, particularly in London and South East England and due to the recent stamp duty mini-holiday, and for younger people it’s even more difficult to buy their own homes, even if they have a large deposit saved. So, family-gifted deposits will be increasingly needed.” 

Aamina Zafar is a freelance journalist