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.
This should of course 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 is intended to give you an overview of the usual processes, and what you can do now to ensure the best outcome for your loved ones.
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:
Equity release after death: repaying the lender
After the last surviving borrower passes away, the lender needs to be repaid within the timeframe agreed at the time of the equity being released.
Most 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 sale of the property. Most equity release plans include a ‘no negative equity guarantee’, which means that there’s no risk to your beneficiaries of the total amount owed exceeding the value of the property - in other words they can rely on being able to sell it 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, in which 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.
What about any 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, so 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, the Equity Release Council lists its accredited providers here.
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 in to 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.
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.
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.
You need to be aware that the PEG applies to the value at the time of the sale following death or admittance into long term care of last borrower, not a percentage of the value at inception. So 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. Get in touch with your provider for details.
Speak to an expert on equity release today!
We’ve helped over 65,000 people find the right mortgage, in fact our customers consistently rate us 5 stars on Feefo, mainly because of the level of service and the fact that we offer OMA offers a 5-star service, with access to leading brokers who:
Are experts on equity release upon death
Have passed the OMA 12 module LIBF accredited training course
Cover the whole of the market
If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.
*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.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
Read more about Pete here...