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Parents see IHT benefits of equity release

Parents are increasingly using equity-release plans to help their children get on the property ladder and ease a potential inheritance tax (IHT) burden.

Equity-release plans enable asset rich, but cash poor, borrowers aged 55 and over to unlock cash from a family home without having to sell up and move out.

Under the “lifetime mortgage” type of plan, repayment of the capital advanced and the interest accrued can be deferred until the borrower dies and the property is sold. Under the “home-reversion” plan, homeowners aged 65 or over sell all or part of their property at a discount to the market value, in return for a tax-free cash lump sum and the right to continue living in the property.

Lifetime mortgages are commonly taken out to free up cash for a holiday or home improvements, or to clear debts. But lenders say more homeowners are now using equity release to help children with a deposit for their first home.

“An increasing number of clients are using equity release to provide financial support to their families,” said Nigel Hare-Scott, managing director of equity- release specialists Home & Capital Advisers. “By making use of a lifetime mortgage or a home-reversion plan, wealth can be passed down to children but – more commonly these days – to grandchildren to help them get on the housing ladder.”

By using equity release to unlock cash but take on new mortgage debt, the value of a property for IHT purposes is also reduced, which can be a useful, and legal, way to avoid tax.

Inheritance tax of 40 per cent is payable on estates above the current nil rate band threshold of £325,000, which was the average house price for Greater London in December.

The maximum equity that can be released from a property is 45 per cent – so owners of more valuable properties can unlock quite large sums