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Explaining Inheritance Tax and equity release

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During our recent research, we discovered that 76% of 371 over 55s surveyed were unsure about the tax implications surrounding gifting*.

And Inheritance Tax plays a significant part of that.

In truth, it can be a difficult subject to get your head around, especially without any prior tax knowledge.

So, we thought we’d explain it in simpler terms. First off, the basics.

What is Inheritance Tax?

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.

Simple enough.

So, what qualifies for Inheritance Tax?

As stated above, property, money and possessions (your estate) are all subject to Inheritance Tax. But only if, together, they are worth more than a certain amount.

Per person, the threshold for Inheritance Tax is £325,000*2. Meaning, if your estate is worth less than £325,000, your estate may not be subject to Inheritance Tax.

If it’s more, you pay 40% on the amount over (or 36% if you leave at least 10% of your estate to charity).

Much like Income Tax, a certain amount - £325,000 in this case - remains untouched, and anything over that may be taxed.

For example, as an individual, if your personal estate is worth £400,000, the first £325,000 is free of Inheritance Tax. So, HMRC only taxes the remaining £75,000.

HMRC take 40% of that remaining £75,000, which is £30,000. So, your estate is left, overall, with £370,000 (made up of the non-taxable allowance of £325,000 and the £45,000 left over after tax has been deducted).

It’s also worth remembering that the allowance is per person. So a couple’s Inheritance Tax threshold stands at £650,000 (£325,000 x 2). (A couple is defined as either married or in a civil partnership)

That all seems fairly straightforward. But is it?

Well, not exactly. Although, there is a positive.

Passing on your home

From April 2020, the non-taxable threshold will be £500,000*3, but this only applies when you are also passing on a home to your children, stepchildren or grandchildren.

Currently (this tax year - 2018/19), there is an extra £125,000 of tax-free allowance for those passing on their home to their children, stepchildren or grandchildren.

Meaning, as things stand, a single person’s Inheritance Tax threshold when passing on their home to a child, stepchild or grandchild is £450,000 (the initial £325,000 allowance plus the extra £125,000).

Following the end of this tax year (2018/19), it is proposed the tax-free threshold will rise by a further £25,000 and reach £500,000 from April 2020 onwards.

As was the case previously, anything above the new thresholds will be taxed at 40%. And remember, the higher threshold only applies to those passing on their home to their child, stepchild or grandchild.

Other bits

It’s also worth bearing in a mind there are other rules surrounding Inheritance Tax you should be aware of.

For example, if you pass all of your estate to your spouse or registered civil partner, your estate is exempt from Inheritance Tax – as long as your spouse or registered civil partner are UK residents.

In addition, people in ‘risky roles’, i.e. the armed force, are Inheritance Tax exempt if they die in active service. The same rule also applies if death was hastened by an injury on active service – even if the person involved is no longer serving*4.

The seven-year rule

If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the three years before you die.

Gifts made three to seven years before your death are taxed on a sliding scale known as ‘taper relief’.

Gifts are not counted towards the value of your estate after seven years.

Of course, it’s tricky to predict these things. And while many alternatives are available, one route some choose is equity release.

Equity release allows the release of tax-free cash currently locked in your home to spend as you wish, including gifting to family and friends.

Using equity release for gifting is one solution for those looking to allow their future generations to enjoy and utilise their inheritance today.

During Q3 in 2018, the Equity Release Council reported a 20% rise in the number of homeowners over 55 releasing equity from their homes compared to that of the same time last year*6.

This rise, when used alongside our own data*7, shows a similar increase in those using equity release to support family and friends.

But of course, equity release is not for everyone. And at Key, we know that. Which is why, if it’s not right for you, we will tell you.

Remember, good advice is Key.

Things to consider

Our independent, specialist equity release advisers search the whole market to find the right equity release plan for you. They’ll explain all the options available and that taking a plan reduces the value of your estate and may affect any means-tested benefits you’re eligible for.

You have to get specialist advice before releasing equity; it’s the only way to do it. The initial consultation is free with no obligation to proceed. If you decide to go ahead with an equity release plan, our advice fee – usually 1.99% of the amount released, subject to a minimum of £1,499 – is payable only on completion.

With a lifetime mortgage; the most popular form of equity release, you’ll still own your home. As with any kind of mortgage, it’s a loan secured against your home. All equity release plans we recommend have a no negative equity guarantee, which means you’ll never owe more than the value of your home.

All information correct at time of publication. Tax rules and rates are subject to change.

* Research conducted by independent researchers Consumer Intelligence among a sample of 371 homeowners - with children or grandchildren - aged 55+ between 2nd July – 10th July 2018
*2 https://www.gov.uk/inheritance-tax
*3 https://www.which.co.uk/news/2018/04/inheritance-tax-changes-in-april-2018-what-you-need-to-know/
*4 https://www.clarionsolicitors.com/blog/inheritance-tax-exemption-for-members-of-the
*5 https://www.moneyadviceservice.org.uk/en/articles/gifts-and-exemptions-from-inheritance-tax
*6 Equity Release Council data
*7 Key’s 2018 Q3 Market Monitor

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