Updated 03 December 2020
If you’re considering equity release as a way of releasing money from your home, you’ll want to know what happens to your plan after you die. Here we cover the issues you’ll need to be aware of, from timescales to inheritance tax. See our main guide to find out more about the general pros and cons of equity release.
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When you die, your home will usually be sold by the executor of your estate, and the proceeds used to pay back the equity release plan (as well as to pay agent and solicitor fees). If there is still money left over, this will be paid to the beneficiaries named in your will.
Equity release lenders usually give you a welcome pack when you first take out your plan. This contains lots of key details, including a plan reference number, which will be important for your beneficiaries or executors. They will need to quote this number when talking to your lender, which they should do as soon as they can after your death. It’s worth noting that your plan can be settled in various ways – it doesn’t have to be through the sale of your home.
In most cases, your equity release plan will need to be paid back within 12 months of your death. The first step is for your beneficiaries to contact your lender, who will ask for a copy of the death certificate and probate document, so that they can communicate with the executors of your estate. Your lender will then get in touch with your executors, and ask how they intend to repay the plan, whether that’s through the sale of your property or other means.
Whether or not your house need to be sold will depend on the kind of equity release you have used, as well as on other circumstance. If you are using a lifetime mortgage (the most popular form of equity release), then this will usually be paid back via the sale of the property. However, there’s no obligation to do it this way if there are other funds available at the time. All that matters is that the plan is paid off somehow.
For example, your beneficiaries might have savings or other assets that could be used instead to pay off the plan. Another option is that the person(s) who inherits your home may choose to keep it as an investment, and pay back the lender with a buy to let mortgage.
Home reversion is the other form of equity release, and this does require the sale of the property (as your provider will already own a share of it). Bear in mind that in most cases the property will need to be sold very soon after the last occupant has died - often as little as four weeks. Your family will need to be made aware of this, as they will have responsibility for clearing the house of your possessions so that it can be sold by the equity release provider.
You will probably want to ensure that your spouse or partner can continue living in your home after your death. To do this, ensure that the mortgage (or home reversion plan) that you arrange with the equity release company is written in both your names. This will ensure that your partner can continue living in the property for the rest of their lives, or until they sell it to go into long-term care. Most equity release providers will stipulate when you apply that your plan is in joint names, but it’s best to check – especially if you and your partner are not married or in a civil partnership.
If your surviving partner wants to downsize (i.e. move into a small property) after your death, it is possible to do this without having to pay off the equity release plan yet. All your partner would need to do is obtain the lender’s agreement that the new property is adequate security for the equity release plan.
If both you and your partner move into long-term care, your plan will come to an end and your property will need to be sold as arranged. The situation is different if just one of you moves to long-term care. Provided the plan was taken out in both your names, your partner can continue to live at home. An alternative approach is to arrange care in your home, which won’t affect your equity release plan at all. Indeed, one popular reason for taking out equity release in the first place is to pay for long-term care at home.
One concern among people considering equity release is how much of an inheritance will be left for their family. It is true that equity release can erode how much of your home’s value is left to leave to your beneficiaries, and in some cases can use up the whole sale value of the property.
Fortunately, there is a way to protect some of the value of your home to ensure you family still inherit a portion of it. You can ‘ring-fence’ some of your home’s value using an inheritance protection guarantee (also known as a protected equity guarantee). This option is now often built in to lifetime mortgages, and allows you to choose a percentage of your property’s value to protect.
Bear in mind that the larger the amount you decide to protect, the less you will be able to release overall from your home. For example, if you decide to protect 30%, the maximum amount your provider will allow you as equity release will be 30% lower.
Using an equity release plan may reduce the amount of inheritance tax (IHT) that is payable on your death. IHT liability is calculated based on the size of your estate, so naturally if you have spent the money already, it can’t be taxed.
Bear in mind that your main home has an extra IHT allowance (called the main residence nil-rate band) which is now £175,000 per person, on top of the standard £325,000 per person. This means that a couple can potentially bequeath a family home worth up to £1 million before any IHT would be payable on it.
However, this extra nil-rate band does not apply to cash released from the home. So in theory, if you released equity from your home and didn’t spend it (so it remained part of your estate), it might become subject to IHT if your estate overall is large enough.
Here’s an example:
David and Helen have a home worth £1 million and other assets worth £50,000 in total. If they were both to die in those circumstances, only the £50,000 would be subject to IHT at 40 per cent – so their beneficiaries would have to pay a bill of £20,000.
However, if they release £250,000 from their home using a lifetime mortgage, their non-home assets become £300,000. After paying off the lifetime mortgage, the sale proceeds from their home come to £750,000. This amount is covered by their ordinary nil-rate band, so is not taxed.
However, the £300,000 in cash is no longer covered by the main residence nil-rate band, so is subject to IHT – resulting in a bill of £120,000 for the beneficiaries.
If you’re in a similar position to David and Helen, you should think carefully about how using equity release might change your estate’s exposure to IHT if you were to die before the money has been spent.
Similarly, exercise caution if you’re planning to use equity release money as a gift. Currently, if you live for at least seven years after gifting the money, it will be exempt from tax. However, if you die within seven years of making the gift, the amount will be subject to IHT, with the full 40% being charged if you die within three years, and a sliding scale of IHT (known as taper relief) charged if you die within four to seven years.
Ask your financial adviser about how your equity release plan might affect your IHT situation.
If you’ve been using an equity release plan, a financial adviser can be a great help to your beneficiaries after your death. It will be a difficult time, especially for a surviving spouse, so the adviser can ensure that the right questions are being asked. In particular, if it is a joint equity release plan, the surviving partner may need to reassess it to confirm that it’s still being managed in the best way.
Here are some of the key benefits:
Nothing requires you to stick with your plan until the completion date. However, if you do decide to repay the borrowed amount earlier than agreed, there will often be an early repayment charge. This can be expensive, though it varies between lenders. The charge usually applies if you repay the loan before the last homeowner dies or moves into long-term care. This route might end up being more costly than continuing with your plan until the end of the agreed term, so be sure to speak to a financial adviser before making any decisions.
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