that using an Equity Release product is a good way to reduce your Inheritance Tax?
Many people wish to reduce or avoid their Inheritance Tax but their main asset is their house. Yes, you can gift your house (or part of it) to your children and after 7 years, it’s free of Inheritance Tax. Sounds easy. But you have to pay rent for your house. It needs to be the full market rent. You need to pay it for as long as you live there – not just 7 years. And you need to review the rent regularly. If the rent you pay falls short of “the market rent”, it fails completely. Also your children will be liable to pay income tax on the rent received and, to make matters worse, they will also be liable for Capital Gains Tax on the increase in value while it belongs to them. And that is usually at 28%.
So that’s not good. Is there a better alternative? Well yes there is. At McClure we often arrange an Equity Release for clients if they are over 55. You can borrow a lump sum on your house. It’s arranged as a normal lifetime mortgage these days. The typical interest rate is around 4%. Unlike the old style of Equity Release, you can actually pay the interest as you go along so you only owe what you originally borrowed. It does not increase.
You then gift the sum raised to your children and after 7 years the gift is free of Inheritance Tax saving you 40%.
So there is no rent to pay. No income tax for your children. No Capital Gains Tax for your children. And no need to review the arrangement every year.
But that’s only half of the story. Your children then protect the “family money” in a McClure Family Protection Trust in case anything goes wrong at their end. This gives you an element of control. The Trustees invest the amount released which will typically grow at around 4%. So as you will see the cost of the interest on the mortgage is normally matched by the growth on the investment.
And you still save 40% IHT without the worry and the hassle and the cost of gifting away your house.
So if it’s a choice between giving away part of your house with all the risk and hassle attached to that or using an equity release scheme for the same purpose, the equity release scheme wins hands down.
So why not arrange a chat with one of our Consultants.
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