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.
