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Equity Release: what happens when you die?

Get the facts on what happens with equity release after death.

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 14th October 2019 *

Whilst death isn’t something we tend to dwell on in everyday life, it’s the focus of one of the most common questions we get from customer considering equity release and the event of them passing away.

Of course, this should be a key question for anyone taking out a mortgage, especially when there is more than one party involved. But it’s of particular importance in the case of equity release plans, which are usually intended to see borrowers through to the end of their life.

This article gives you an overview of the usual processes, and what you can do now to ensure the best outcome for your loved ones.

In this article, we cover:

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Equity release: What happens after death?

Equity release is a good way to give yourself some capital from your home without the need to sell your property. But what happens when you die and how does it affect those you leave behind?

When you die, usually your home will be sold. The money raised by the sale of your property will pay the estate agent, the solicitor’s fees and any money remaining will be used to pay off the equity release loan. After all these payments have been met, any remaining proceeds will go to your beneficiaries.

It is possible, if there’s enough money in your estate to pay off the equity loan without selling the house, your executor can do this instead. 

These days, most equity release plans come with protection against negative equity. If your equity release plan has this guarantee, your beneficiaries won’t need to repay more than the value of your home, even in the event that the debt exceeds the proceeds of a sale. 

There are a number of steps that the deceased homeowner’s appointed beneficiaries will need to take in the months following their death. The main priorities are as follows:

Repaying the mortgage lender

After the last surviving borrower passes away, the mortgage lender needs to be repaid within the time frame agreed. At the time the arrangement was drawn up, the lender would have stipulated an agreed time frame of expected repayment. These details will be on the equity release agreement.

Most mortgage lenders allow a period of 12 months for the beneficiaries to arrange and action repayment of the remaining loan plus accumulated interest, but if you’re not sure of what timescale was agreed, you can confirm this with your lender at any time.

To sell or not to sell?

In the majority of cases, repayment is achieved through the sale of the property. 

Most equity release plans include a ‘no negative equity guarantee’. This means that there’s no risk that your beneficiaries will have to pay any more than the property is worth, even if the debt owed exceeds this at the time of your death. In other words, your beneficiaries can rely on being able to sell the property to cover the debt.

While selling is always an option, beneficiaries can usually choose to instead keep the property for themselves, provided they can pay off the original loan plus interest using their own capital, or in some cases using funds from elsewhere in your estate.

An exception to this rule is in the case of rarer types of equity release, known as home reversion plans. With this kind of equity release arrangement, the original homeowner sells all or part of their home to the lender before their death, in exchange for a cash lump sum and rent-free occupancy for the remainder of their life. In these cases, ownership ‘reverts’ to the lender upon death.

Surviving partners

The Equity Release Council sets out specific rules about what happens to surviving partners in the event that one of the borrowers dies. 

As long as the equity release scheme adheres to these rules, and both partners are named as borrowers on the mortgage, the surviving partner will be entitled to stay in the property under the same terms and conditions as before - for as long as they live.

‘On death’ therefore usually means on the death of the last surviving borrower. If you want to make sure that your provider adheres to these rules, you can find a list of accredited providers on the Equity Release Council’s website.

Equity release and inheritance tax

How does equity release affect inheritance tax? The cash you receive from equity release is essentially borrowing money rather than additional cash or income, so it shouldn’t impact personal income or tax until you pass it on.

A significant repercussion of releasing equity from your home is that your family won’t be able to inherit the property as would often be the case with a standard mortgage.

However, this consequence can have an impact on Inheritance tax (IHT) that could work in your beneficiaries’ favour.

The IHT threshold currently stands at £325,000, and the rate is 40%, so this is a hefty amount to factor into your estate planning.

Does equity release reduce inheritance tax?

There are certain ways in which equity release can reduce the amount of IHT due on a homeowner’s estate due to the way different types of assets are taxed.

Using equity release to reduce IHT

By releasing equity in your property, you are effectively reducing the value of your property - potentially to a value below the £325,000 IHT threshold. This in turn reduces the amount of tax due on it, and may even remove the liability altogether.

Cash gifts

You are entitled to give away assets to whoever you choose, and these do not attract inheritance tax as long as you are alive. This could, for example, be part of the equity you released from your property.

However, if you die within 7 years of gifting any amount of money, the recipient(s) may unfortunately have to pay IHT on it. 

See the UK tax rules on gifts for more info.

If you want to gift money without the risk of incurring IHT, there is a specific insurance product you can consider called a ‘gift inter vivos’ which is designed to offset the amount of IHT that a beneficiary is liable for if you, the donor, die within 7 years of making the gift.

If this is something you are interested in arranging, speak to one of the experts we work with on 0808 189 2301 or make an enquiry and we’ll introduce you to an expert who can help.

Equity release inheritance guarantees

If you have a lifetime mortgage, your loved ones can also benefit from what’s known as a ‘protected equity guarantee’. This feature allows you to ring-fence a certain percentage of the property’s value to ensure it is passed on to your beneficiaries as a protected amount.

The protected equity guarantee applies to the value at the time of the sale following death or admittance into long term care of last borrower, and is not a percentage of the value at inception. This means that, if a property falls in value, so does the cash value of the protected element.

Can equity release be repaid before death?

Usually yes, but all lenders charge an early repayment fee in these instances. We have an article all about paying off equity release plans early, alternatively you can contact your provider for details.

If you have any questions about your equity release plan and want to talk to an expert, get in touch...

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Updated: 14th October 2019
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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