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Equity release vs inheritance tax – how do both routes differ when passing wealth onto the next generation?

Chancellor Jeremy Hunt is expected to announce a cut inheritance tax (IHT) in his Autumn Statement, affecting 4% of all UK families. Rudy Khaitan, Managing Partner of Senior Capital, explains why equity release can represent an attractive option for those looking to pass on tax-free wealth to their family.

Speculations around the size of the reduction range from reducing the IHT rate to 30% or even further to 20%, as well as raising the threshold from £325,000 to £500,000, highlighting the government’s acknowledgment of the public’s discontent with this tax.

Perceived as a levy on death and the transfer of wealth between generations, approximately 4% of families, or 27,000 households in the 2020/21 tax year, currently pay IHT, with the potential adjustments aiming to address both the unpopularity of the tax and its impact on families. However, this expected announcement has also brought into light other options which UK pensioners have when they wish to transfer wealth to family members, such as equity release.   

 
 

Rudy Khaitan explains that though this proposed IHT cut will help reduce a financial burden on many families, equity release still stands out as a proactive solution that addresses the financial needs of pensioners during their lifetime, irrespective of changes to the IHT. The UK equity release market, having grown by 100% in the last five years, is now seeing record activity as consumers continue to feel the financial impacts of inflationary pressures and consistently high interest rates. 

By unlocking the value tied up in their properties, UK pensioners can access a substantial source of income without waiting for the inheritance process. This immediate financial relief – which is also tax-free – allows pensioners to maintain their standard of living during the UK’s cost-of-living crisis, in contrast, modifications to the IHT, while potentially reducing the tax burden on inheritors, do not directly address the pressing financial concerns of pensioners themselves and anything passed down through an inheritance is currently taxed at 40%.

While the government explores options to cut the IHT rate, it is essential to recognise that equity release can provide a tangible and immediate solution for pensioners, both offering them the means to enjoy their retirement years without compromising their financial well-being and the ability to pass on wealth to their families. 

 

Managing Partner of Senior Capital, Rudy Khaitan, says: 

“In today’s society, many over 55s find themselves in a paradoxical situation – they are ‘asset-rich’ due to the value of their homes, yet ‘cash-poor’ with limited disposable income. As the cost of living continues to rise, many find themselves struggling to make ends meet, despite owning valuable properties.  

“Equity release offers a solution to this dilemma by enabling homeowners to tap into the wealth tied up in their homes. It can provide a much-needed cash injection to enhance their quality of life, cover unexpected expenses, or even help their families.

 
 

“Equity release is more than just a financial transaction; it’s a means of bridging the gap between asset wealth and living standards, ensuring that those who have worked their whole lives to build their assets can finally reap the benefits of their hard work.”

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