Increasing numbers of older homeowners are turning to equity release to fund financial gifts for their children and grandchildren.
As the name suggests, equity release involves unlocking wealth from your property. You can remain in your home for life, and only when you and your partner pass away or move into long-term care, is your property sold and what you owe repaid.
Equity release customers are cashing in an average £73,610 tax-free from property wealth, according to equity release provider Key's recent market monitor, with more than one in five (22%) customers using some or all of the cash to help their families. Separate research from Saga found that the amount people have gifted to family has increased by over a quarter since 2012 and now typically stands at £33,000.
Always seek professional financial advice if you’re considering equity release, as using this type of scheme can affect your entitlement to some state benefits and will reduce the value of your estate.
Reasons for the ‘Bank of Mum and Dad’ wanting to provide financial support are varied. Separate research by Key found that more than half (58%) want to be able to help children and grandchildren onto the property ladder, whilst around 18% of parents and grandparents want to help pay off their debts and student loans. A further 13% want to fund a wedding for their children or grandchildren.
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Dean Mirfin, technical director at Key Equity Release, said:“At a time when the financial squeeze on younger generations is getting worse it makes sense that grandparents and parents want to help their family now rather than waiting till their death. But there is real nervousness and confusion when it comes to the awareness around the rules of financial gifting.”
Under current Inheritance Tax (IHT) rules, you must pay IHT at a rate of 40% on the value of your estate above £325,000, or £650,000 if you’re married or widowed.
There’s also an additional £100,000 main home allowance which was introduced in April this year. This is due to rise to £175,000 per person by April 2020. The home allowance can only be used if you are passing your family home to your children or grandchildren. There are various annual allowances which enable you to give away small financial gifts free of IHT. For example, you can give £3,000 each tax year, so couples can give away £6,000 between them.
Mr Mirfin said: “Any gifts over the value of £3,000 need to be given more than seven years before death or they are potentially liable to 40% inheritance tax, if the threshold is exceeded.
“The good news is that for the majority of people gifts should be exempt where wealth is predominantly in the home. However, for those whom this would not be the case there should be greater incentive to gift.”