How does equity release work for early inheritance to children?

[chewytalagi]

Can anyone please explain how equity release works? Property value 1million, owned outright. If owners wanted to give early inheritance to their 3 children of 100k each, is that possible and / or advisable?

This is what has happened with someone I know. Released some equity 20+ years ago for holidays etc now there will be virtually nothing left if she needs to sell the house to pay for care or nothing left for the kids to inherit.

Well all I can say is she had huge interest payments that completely wrecked her finances. Maybe this isn't how all equity release works, but this company was a major provider

It depends on the deal. It’s also normally paid back if the property is sold.

My parents did this for us as they were conscious that by the time we would inherit we would (hopefully) have already had to set up our own lives and homes etc and they wanted to help sooner.

My dad engaged a financial advisor to help with it and made a decision on the amount they could afford to give based on the interest rate (which was lower at the time). We also all make small repayments for it to help stave off some of the interest down the line.

But at least she will have been able to enjoy later years. Should she live in misery so that her children can inherit?

Its a terrible idea. Its basically a really expensive way to access your asset.

Far far better option would be to downsize.

Bad idea. The HMRC will be after you for tax on the gift. You are basically paying the equity release firm 6% interest and your estate being charged 40% IHT.

They will not. There is no tax payable on gifts, either by the person giving it or the one receiving it.

If the giver dies within seven years of the gift being given then their estate may be taxed on some or all of the amount, but as that can only happen after the giver is dead it is never the case that HMRC will come after her for it.

Surely this is a question for your offspring? If they are content with a reduced inheritance, in return for £100k each now, then that's their preference.
Interest on ER is generally high. You'r estate would probably pay 7% to 7.5%, and in twenty years that £1.2m. But, if house prices keep up with inflation, say 3% pa, the house would be worth £1.8m in twenty years.

I can see good reasons not to downsize. You might like your current house/neighbours/locality. And the stress of moving is unappealing. Discuss it with your kids

Mil is doing equity release to pay for her care costs as she’s not happy with the council’s care package. She had to have a IFA who will make a generous fee. She’s lucky she has the choice I suppose.

Equity Release is abhorrent. When you die they will probably have racked up so much interest that the remaining £700k is gone. My advice would be to sell the house, downsize and gift money that way. (Retired Bank Manager here)

Lifetime mortgages are the more modern approach, if you have nobody to inherit then you basically give your house to the company when you die in exchange for no payments whilst alive for somewhere iro 50% of it’s value.
If you want family to inherit something then you pay the interest and the capital is repaid by your estate so they would get 40-50% of the value.

7% of £500k is £35k a year, to give an idea of interest repayments! Even if you only took £200k the interest would be £14000.

Nobody gets more than 60% of the property value, the younger you are it can go down to as little as 45%. The average, I believe, is 50%.

No, some councils consider it relevant for years after it’s been done.

I’m not sure about this.

I had a session re planning for retirement and estate planning.

We discussed a form of Equity Release which was a debt on the property. So with an £800k house you could release eg £400k for children for house deposits. If you live 7 years it isn’t part of the estate, and as a debt against the house it reduces the value for IHT. The interest rate is relatively high but the debt doesn’t go beyond the value of the house. So nothing owing from other assets.

Down size and give them the money

The council would have to prove that there was intent to deprive yourself of assets to avoid paying for care fees. This is incredibly difficult to prove if the person has no reason to think they'll need care in the immediate future. They may ask for information of any assets that were gifted in the last few years but that doesn't mean that they'll treat it as deprivation