Inheriting a property can be a life-changing event, but when that property comes with an equity release plan attached, it can also raise many questions and concerns.
As someone who has helped many clients navigate this complex situation, we know firsthand the importance of understanding how equity release affects the inheritance process. When our client Sarah recently inherited her parents’ home, which had an outstanding lifetime mortgage, she was unsure about what this meant for her and her siblings.
Her father had taken out an equity release plan to fund home renovations and travel in his retirement years. Sarah had many questions about what this meant for her inheritance and the steps she needed to take.
In this article, we’ll cover the key considerations when inheriting a house with equity release, including:
- How equity release affects the inherited property
- Repaying the equity release loan
- Inheritance tax implications
- Capital gains tax and stamp duty
Together, we explored the key considerations, from repaying the loan to potential tax implications, so she could make an informed decision. If you find yourself in a similar situation, read on to discover what you need to know about inheriting a house with equity release.
Table of Contents
What happens to equity release when you die?
When the last surviving borrower dies, the equity release loan becomes due. The loan must be repaid, typically by selling the property, and any remaining proceeds will be distributed to the beneficiaries.
Can I inherit a house with equity release?
Yes, you can inherit a house with an outstanding equity release loan. However, the loan must be repaid from the estate, either by selling the property or using other funds.
How long do I have to repay an inherited equity release loan?
Most equity release providers allow up to 12 months for the loan to be repaid after the borrower’s death. Some may extend this to 24 months in exceptional circumstances.
The trouble is that the longer you leave, the more interest and charges are added up, leaving you with a reduced inheritance as each day passes!
Will inheriting a property with equity release affect inheritance tax?
The outstanding equity release loan will be deducted from the property’s value when calculating inheritance tax. This can reduce the overall value of the estate and potentially lower the inheritance tax liability.
Refer to our example later on.
How Does Equity Release Affect the Inherited Property?
When you inherit a property with an outstanding equity release loan, the loan must be repaid from the estate. The amount owed includes the initial amount borrowed plus the accrued interest. Equity release plans operate on a “roll-up” basis, meaning the interest compounds over time. Here’s an example:
| Equity Release Loan Details | Amount |
|---|---|
| Initial loan amount | £50,000 |
| Years since the loan began | 15 |
| Interest rate (compounded annually) | 5% |
| The total amount owed at inheritance | £105,198 |
As the table above shows, the amount owed can grow significantly over time, reducing the final value of the estate.
Repaying the Equity Release Loan
Upon the death of the last surviving borrower, the equity release provider will need to be repaid. Typically, you’ll have two options:
- Sell the property: The most common way to repay the loan is by selling the inherited property. The sale proceeds will be used to pay off the outstanding balance, and any remaining funds will be distributed to the beneficiaries according to the will.
- Repay the loan using other funds: If you wish to keep the property, you can repay the equity release loan using other assets from the estate or your personal funds. This might involve taking out a mortgage on the property.
Sarah ultimately decided to sell her parents’ home, as she already had her own property and couldn’t afford to repay the loan herself. The sale proceeds covered the outstanding equity release balance, and she and her siblings split the remaining funds.
Inheritance Tax Implications
Inheritance tax (IHT) is a key consideration when dealing with an estate with an equity release plan. The outstanding loan amount will be deducted from the estate’s value before calculating IHT.
For example:
- Property value at inheritance: £300,000
- Outstanding equity release loan: £105,198
- The net value of the property for IHT: £194,802
Suppose the total estate value, including the net property value and other assets, exceeds the current IHT threshold (£325,000 for individuals or up to £650,000 for married couples). In that case, IHT will be due at a rate of 40% on the amount above the threshold.
Capital Gains Tax and Stamp Duty
When inheriting a property, you won’t face any capital gains tax (CGT) liabilities initially. However, if you decide to sell the property later and it has increased in value, you may need to pay CGT on the profit. If you choose to keep the inherited property and take out a mortgage to repay the equity release loan, you won’t need to pay stamp duty land tax (SDLT).
However, if you purchase the property from the estate using a mortgage, SDLT may be due depending on the property’s value and your circumstances.
Useful Tips
- Consult a Financial Advisor: Given the complexity of equity release and inheritance tax laws, consulting with a financial advisor can provide valuable guidance tailored to your specific situation.
- Explore Inheritance Protection Options: If you are considering equity release, look for plans that offer inheritance protection to safeguard a portion of your property’s value for your beneficiaries.
- Consider Alternative Funding: If retaining the property is important, explore alternative funding options such as taking out a mortgage or using other estate assets to repay the loan.
Options for Beneficiaries
Beneficiaries have several options when dealing with an inherited property with equity release:
- Selling the Property: The most common approach is to sell the property to repay the equity release loan. Any remaining funds after the loan repayment are distributed to the beneficiaries according to the will.
- Retaining the Property: If beneficiaries wish to keep the property, they can repay the loan using other estate assets or personal funds. This might involve taking out a mortgage on the property.
- Inheritance Protection: Some equity release plans offer inheritance protection, allowing a portion of the property’s value to be reserved for inheritance. This option can ensure that beneficiaries receive some inheritance even after the loan is repaid.
Why Choose Property Saviour?
Equity release plans, particularly lifetime mortgages, accrue interest over time. This means that the amount owed on the property grows daily, eating into the remaining equity and reducing the potential inheritance for beneficiaries. As Sarah’s story illustrates, her parents’ £50,000 equity release loan had grown to over £105,000 after 15 years due to the compounding interest.
The longer the property remains unsold, the more the debt will increase, leaving less money for the beneficiaries to inherit.
Selling through an estate agent can be a lengthy process, often taking several months. Factors such as property chains, surveys, and mortgage approvals can cause delays.
Meanwhile, the equity release interest continues to accrue daily, further diminishing the inheritance. Estate agents may also encourage price reductions to secure a sale, which can lower the final inheritance amount even more when combined with the growing equity release debt.
In contrast, Property Saviour can buy inherited properties quickly, usually within 10 days or at a timescale that suits you. As cash buyers, we don’t require surveys or mortgage approvals that could hold up the sale.
By securing a fast sale, you can stop the accumulation of interest on the equity release loan and preserve more of the property’s value for inheritance. Property Saviour’s reviews from real sellers show our commitment to a smooth, certain sale.
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