Early Inheritance Equity Release
Gone are the days where you inherit your parents’ property, get married and live in that property for your whole life. In this article, we’ll explain how early inheritance equity release works so that you can go on your overseas trips with your parents if you want to!
Let’s quickly look at what equity release is again:
What’s Equity Release?
Equity release refers to your property’s items/parts that let you access your money tied up in your house. However, you can only gain access once you’re 55 years or older. You can get the capital value of objects in your home as a lump sum or an income based on the house’s value. You’ll just need to repay that money you accessed at a later stage. There are two types:
- Lifetime Mortgage
The first type of equity release is a lifetime mortgage. This type lets you take out a mortgage on your home if it’s your primary residence. However, you will remain the owner. You’ll have the option to ringfence part of your property for your family to inherit. You can also make repayments or let the interest increase.
Better yet, if there’s any loan amount or any accrued interest, it’ll be paid back when you pass away or need long-term medical care.
- Home Reversion
The second type is a home reversion, which means you sell some of your property or your whole property. You can sell it to someone like a home reversion provider, and they’ll pay you a lump sum for it, but they can also pay you in regular payments. It’s your choice
Now, how does this affect an early inheritance?
The concept of inheritance is long overdue, a change-up, especially now that Britons live longer, better, healthier, and more active lives. Today, you can receive an inheritance early from your parents, for example, even if they’ve taken out an equity release plan. Several people plan to rely on that inheritance, instead of a pension, to fund their retirement. So, getting an early inheritance can be quite beneficial for your future financial planning etc.
Skipton Building Society did some research recently and found that 1 out of 4 people don’t plan to give their children an inheritance. Something new has happened: spending the kid’s inheritance (or SKIers for short). More and more retired folks are celebrating the end of their lives with their children’s inheritance money.
Passing on a Legacy
This can sound surprising, but if you look a little deeper, SKIers may have passed on a legacy already, in some way or another. Many people choose to gift their loved ones an ‘early inheritance’ as life gets more and more expensive to get yourself into a promising career – training courses, university costs, property deposits, weddings, new-born babies etc. The list goes on and on, as does your credit card bill.
For those who are helping their family in different ways than the norm, leaving a legacy isn’t enough. People want to see their inheritance being enjoyed while they’re still alive. That’s why SKIers are using their most significant asset, their property, to help their family with a leg-up in life.
Now, how does equity release relate to an inheritance in action?
Inheritance in Action with Equity Release
If you have a safe type of equity release like a lifetime mortgage, and you’re older than 55 taking money out of your property to help your family, it’s called an early inheritance. Many people use their equity from their home or property to gift their families with a financial boost.
Let me tell you something…
You can release £10,000 minimum and can leave more than that in a reserve fund so that you can withdraw it as and when you need it for extra expenses or something else. You can pay off an existing loan or mortgage as well, freeing you from monthly repayments.
2 Steps to Protecting Your Inheritance
1. Inheritance Protection
A lifetime mortgage is a loan against your home. Inheritance Protection is an excellent option to protect your lifetime mortgage and secure a portion of your home’s total sale proceeds for the heirs. If you choose this option, your loan amount might be reduced.
If your property is worth £200,000 currently and you want to protect 30% of that amount, the maximum loan amount will be 70% of your property’s value – meaning £140,000 instead of £200,000.
If you’re very set on leaving an inheritance, you should choose this option. You’ll need to say what percentage you’d like to protect (called the Protected Percentage) when applying for your lifetime mortgage.
Listen to this:
Inheritance Protection1 can’t be added to your lifetime mortgage or the increased loan amount after your lifetime mortgage has ended. Your financial adviser should help you decide if Inheritance Protection is the right thing for you, and you should also discuss with your family how a lifetime mortgage will impact your inheritance before making a decision.
2. Early Repayments
When it comes to a lifetime mortgage, you can repay some of the interest on the loan or all of it at once. You can also repay some of the capital. This will reduce your total loan amount and potentially leave more money for your family to inherit when you die. It’s all up to you.
You are limited as to how much you can repay and how often you can repay. If you don’t like the sound of that, you don’t have to repay anything until you die or move into long-term care.
What if your family needs financial help now?
By taking out equity release, you can help your family out if they require some money. You can support your great-grandchildren, for example, to do what they want to do. Then, you’ll also be able to see them enjoy your money while you’re still alive.
7 Things to Think About
- The Financial Conduct Authority2 requires that you get specialist advice from a qualified professional equity release adviser before releasing tax-free cash from your property.
- There are multiple companies offering lifetime mortgages, which are loans secured against your property.
- Think carefully before taking out a loan against your home.
- Equity release will decrease your estate value and may impact your entitlement to means-tested benefits.
- You remain the homeowner of the property with a lifetime mortgage.
- Take out a plan with a no-negative equity guarantee3 so that you’ll never owe more than your property’s value.
- With some equity release plans, you can guarantee an inheritance.
What are the timescales to taking out your equity release? An equity release application takes about 4 – 6 weeks for lifetime mortgages (the most popular type of equity release ) and 6 – 8 weeks for home reversion plans if the property title is clear.
Sometimes, parents can give a big monetary gift to their child and say it’s an “early inheritance.” For tax purposes, there’s no such thing as an “early inheritance.” The Internal Revenue Service, or IRS, considers it as a gift. The amount is subject to a gift tax as well if it’s above a certain amount.
Usually, the only way to get your inheritance early is if your parent gives that to you before they pass away. But sometimes, a parent dies, and their assets are held in trust for the benefit of their surviving spouse.
You can give your heirs as much money as you like while you’re alive, as long as they are permanent UK citizens. Other gifts go towards the value of your estate. People receiving your gifts will have to pay Inheritance Tax if it’s more than £325,000 in the seven years before you pass away.
It’s so amazing that you have the luxury to bless your family with an early inheritance and to see them flourish because of it! If you have any further questions, please don’t hesitate to contact us at any time!