What happens to the equity release if I pass away?

When you pass away, your estate (all your assets) will be distributed according to your will or the rules of intestacy (dying without a will). Your equity release plan, which uses your home’s value as security, will be settled, typically involving your beneficiaries repaying the outstanding loan amount from your estate or the sale of your property. Understanding this process is crucial for financial planning.

Understanding Equity Release and Inheritance

Equity release allows homeowners aged 55 and over to access the cash tied up in their property without selling it. The loan is secured against the property, meaning the lender has a right to recover the debt if the property is sold. But what happens to this arrangement after death?

There are several key things to understand:

• Loan Repayment: Upon your death, the outstanding balance of your equity release plan (including any accumulated interest) must be repaid. This typically involves your estate settling the debt.
• Estate Distribution: The remaining equity in your property – the value after the loan repayment – forms part of your estate. This will then be distributed according to your will or intestacy rules.
• Inheritance Tax: The portion of your estate that’s left after loan repayment is potentially subject to inheritance tax (IHT). The current IHT threshold is £325,000 for individuals in England and Wales. You should seek professional financial advice to understand IHT implications.
• Will Planning: It’s vital to clearly outline your wishes regarding your property and equity release loan in your will. This ensures a smooth process for your beneficiaries after you pass away. Consider specifying whether the property should be sold to repay the loan or if other assets should be used.

How the Loan is Repaid

The method of repayment depends on several factors including your will, the value of your estate, and the type of equity release plan you have. There are generally two ways the loan is repaid:

• From your Estate: If your estate contains sufficient funds, the loan will be repaid from your other assets, leaving the remaining equity for your beneficiaries.
• Sale of the Property: If there are insufficient funds in your estate to cover the loan, the property may need to be sold to settle the debt. The proceeds of the sale will be used to repay the loan and any remaining balance will be distributed amongst your beneficiaries as per your will.

Types of Equity Release Plans and Their Impact

Different equity release plans may have varying implications for your beneficiaries. It’s important to understand the specifics of your plan before making any decisions. Speak to a financial advisor for personalized guidance.

For example, some plans allow for the interest to roll up throughout your lifetime, while others involve making regular interest payments. The accumulated interest significantly impacts the amount your beneficiaries will inherit.

Potential Tax Implications

The amount your beneficiaries inherit after the loan repayment will be considered part of your estate and may be subject to IHT. Understanding the potential tax liability is crucial for financial planning. The IHT threshold and rates can change, so it’s advisable to seek up-to-date advice from a financial professional.

For detailed information on inheritance tax, you can visit the Government website on Inheritance Tax.

Protecting Your Beneficiaries

Planning ahead is crucial to protect your beneficiaries’ inheritance. A comprehensive will that clearly outlines your wishes regarding your property and equity release is a vital step. This allows for a smoother transition of your assets and minimises any potential disputes.

It is also important to regularly review your equity release plan and your will to ensure they still meet your needs and expectations, particularly as financial circumstances change.

People also asked

What if I don’t have a will?

If you die without a will (intestate), the distribution of your estate, including any remaining equity after loan repayment, will be determined by the rules of intestacy, which can vary depending on your circumstances and location.

Can I change my equity release plan?

You may be able to make changes to your plan, depending on the terms and conditions; however, this will depend on the specifics of your plan, so it is recommended to speak with your provider directly to discuss your options.

How long does it take to settle an equity release plan after death?

The time it takes to settle the plan can vary, but it generally involves a process of probate, valuation of the property and estate and transfer of funds; this can take several months to complete.

What happens if my beneficiaries cannot afford to repay the loan?

If your estate lacks sufficient funds, the property may need to be sold to repay the outstanding loan. This is a common occurrence and is planned for in many equity release schemes.

Does equity release affect my state pension?

Equity release itself does not directly affect your state pension. However, the use of the funds from equity release may indirectly impact your benefits in some circumstances. Seek independent financial advice for guidance on the impact of any financial decisions.

Is there a time limit on repaying an equity release loan?

There is generally no fixed time limit on repaying an equity release loan while you are alive. However, the loan becomes due upon death and must be repaid from your estate.

Your property may be at risk if repayments are not made. Failure to meet repayments could lead to legal action, repossession of your property, increased interest rates, and additional charges.