How to reduce the tax on inheritance From Daily Mail

Daily Mail 28/02/2007

FREEING up cash locked in your home through equity release could help to reduce your future inheritance tax bill and allow you to spend money on yourself or make a gift to your family while you are still around to see them enjoy it.

Most middle-class homeowners have the bulk of their wealth tied up in their property. By unlocking some of it and giving it away at least seven years before you die, your relatives could avoid paying inheritance tax (IHT) on this amount.

But you need to be careful how you use this side-effect of equity release in case it ends up costing you more than you are keeping from the Treasury.

It can work like this. A 75-yearold living in his or her £400,000 home borrows £100,000 through a lifetime mortgage. This reduces the equity in their home to £300,000 -- the amount you can leave to your heirs without paying IHT from April this year.

The £100,000 can be spent or given away. If you give it away and survive for seven years it will avoid £40,000 inheritance tax.

The key point is that you must spend the money or give it away. If you just keep it or invest it then it will remain in your estate and be taxed.

The catch is that you'll be charged interest on the £100,000 released which is rolled up, added to the debt and must be repaid from the estate when you die. After seven years the debt will have grown by £50,000 at the average interest rate of 6 pc, according to specialist equity release advisers Key Retirement Solutions.

Being charged £50,000 interest to save £40,000 inheritance tax might not look like a good deal on the surface. But it depends how the money you release is used.
Dean Mirfin, of Key Retirement Solutions, says: 'If you wanted to give money to a child or grandchild to put into property it could still be a good idea. Your heirs would get the growth in the property value as well as potentially saving on tax.

'Plus, you'll have the satisfaction of helping your family now, rather than after your death. However, if you're doing it purely to beat the tax man there's no guarantee you'll succeed.'
House prices in the UK have more than doubled in the past seven years, rising by 129 pc, according to the Halifax.
If that were to be repeated in the next seven years, then the £100,000 you gave to your grandchildren to invest in a home might grow to £229,000. Again, there are no guarantees and house prices could fall.

And if you were still in robust health after seven years you could even repeat the equity release exercise. Martin Ellis, chief economist at the Halifax, says: 'We expect house prices to go up by 4pc overall this year and by 5 to 7 pc in the next few years. But there are also regional differences to take into account.

'In the past ten years prices in London rose the most by 223pc, while in Scotland they went up by 110 pc, which means they've still more than doubled.'

Lifetime mortgages are available to those over 60, but if you borrow against your home too early the amount of debt that builds up is likely to be far more than the tax saving. An interest rate of 6 pc would result in the amount owed doubling in 12 to 13 years.

The life expectancy of a healthy 75-year-old is eight years for a man and 11 years for a woman, according to Kevin Carr of LifeSearch.

An equity release loan is repaid when you sell up, move into longterm care or die.

If you are considering a loan make sure the company you choose belongs to Safe Home Income Plans (SHIP). Its members guarantee that you never to have to sell if you owe more than your home is worth.

The other type of equity release is home reversion schemes, where you sell a portion of your property while continuing to live in it. They will be regulated from April 6, but they are too expensive to make savings on IHT.

©2007 Associated Newspapers. All rights reserved
Date: 28/02/2007
Publication: Daily Mail