Elderly homeowners who are sold equity release schemes on the promise that it will cut their inheritance tax liability could be £1,000s worse off, according to Manchester-based Glaisyers Solicitors.
Mortgage-based equity release schemes allow elderly homeowners to release cash from their property without having to make payments during their lifetime. The interest is 'rolled up' and becomes payable on death, or when the property is sold.
Simon Creeber, head of financial services at Manchester based Glaisyers Solicitors, says: “I believe equity release schemes work, but they could back-fire if used by wealthy homeowners to reduce their inheritance tax bill. I'm aware of this happening more and more at the moment”
The IHT plan works by investing the loan proceeds in trust, which under current IHT rules is free from tax for 7 years. On death, the loan plus interest is deducted from the person's estate before Inheritance Tax is payable. The scheme appears to offer a double benefit – the gift is Inheritance Tax free after 7 years, while the debt reduces the amount of tax payable on the remaining estate.
Creeber adds: “The problem arises if the subsequent investment returns do not exceed the interest payable on the loan. With current low savings rates, uncertain stock market returns and even a possible fall in house prices, this could certainly be the case. The homeowner's family could then find that the interest due on the loan reduces the value of the estate much more than the original inheritance tax bill.
“The adviser could receive significant commission for arranging the mortgage and the subsequent investment. Clients should make sure that any such scheme is likely to produce a worthwhile benefit to them before proceeding.”