The largest inheritance issue most people face is the equity in their homes.
The current Nil Rate Band for inheritance tax (IHT) of £325,000 combined with the Transferable Nil Rate Band give a potential £650,000 IHT saving for a married couple or civil partnership.
The limit increases if the residence passes to descendants by an extra £150,000 IHT allowance per person.
This allowance is called the Residence Nil Rate Band (RNRB) and is due to rise to £175,000 by 2020. It can be transferred to your spouse or civil partner.
However, this RNRB applies to estates up to £2m reducing the amount that can be claimed for estates above this limit.
Conflict with trusts
Equity release allows owners to reduce the value of the property on their estate for Inheritance Tax (IHT) and at the same time still to benefit from the full value of the property by continuing to live in it.
Other homeowners may have sought to use trusts as a way of estate planning.
However, a little known, but significant, issue arises where equity release is considered by those who have already undertaken some tax or estate planning, for example by setting up trusts.
Trusts are common and can be vital to secure the wellbeing of surviving partners, reduce their tax exposure, or ensure that people can direct their wealth where they want after their death.
A common example is where a partner leaves in first instance a share of their property on a ‘life interest trust’ to their current partner¸ so that the survivor can live there until their time comes, and the ultimate beneficiaries of this share of the property will be their children.
Potentially disastrous outcomes
One would think that such arrangements should be straightforward, but problems occur when trying to combine equity release with the tax planning solution.
This is specifically the case when a widowed person chooses to remarry. These second relationships require great care in order to avoid unforeseen and potentially disastrous outcomes.
For example, if a party leaves a life interest in a property to their partner but the equity release product was only in his or her name, the equity release product will become payable on that party’s death and therefore must be repaid then.
This could then force the surviving partner out of their home.
Previous relationships and children
Another common problem occurs when a couple have had previous marriages or relationships and children.
It is common for the new partner to stay living in the house after their death but then for each partner to want their share to go to ‘their own’ children.
The danger that arises when these issues have not been sufficiently well thought through, is that any trust drafted to take account of the equity release product might result in a situation whereby the outstanding loan repayment comes only from the share of the last surviving partner – causing extreme family friction after death due to the financial imbalance created between the families.
Problems also occur if a property is placed in a life interest trust with a view to seeking to avoid care home fees.
This can have huge financial risks and could be a completely pointless exercise if the owner is also looking to use equity release.
The trust would prevent the property being available for equity release and might even deprive retirees of a valuable option to release funds in their later years with which to live comfortably.
These are just three examples of how common estate planning tools and equity release need very careful consideration.
They highlight situations in which perfectly reasonable attempts at estate planning can fail if suitable advice is not taken at the outset and at points of change in any given circumstances.
Specialist legal advice can help prevent many of the issues and indeed resolve some of the problems inadvertently already created.
Equity release can be a very viable solution for IHT planning and the family home, but the danger comes when equity release becomes the de facto financial solution especially if other IHT planning strategies are already in place or being considered.
Any broker that is asked about equity release and estate planning would be advised to recommend to their client that they also seek legal advice to go alongside the recommendations.