Inheritance protection & equity release: what is it?
Last updated 31st July 2023
4 min read
Inheritance protection is an option available with some equity release plans. It allows you to set aside a guaranteed inheritance for your loved ones to receive after you pass away and your loan has been repaid.
It’s a common myth that you won’t be able to leave inheritance with equity release, but in reality that may not be the case.
In fact, whether you wish to help your children or grandchildren onto the property ladder, leave a nest egg to ensure your loved ones can live comfortably, or to treat your family to a holiday in your memory, it’s still possible with an inheritance protection guarantee.
In this article we’ll explain what exactly an inheritance protection guarantee is and how much money you can set aside for your loved ones when going ahead with equity release.
Why is inheritance protection needed?
Equity release is a way of releasing some of the money from the value of your home, usually between 20% and 60%, which is often used towards things like home improvements or paying off debts. You can learn more about what equity release is and the different types of schemes in our helpful guide.
With an equity release mortgage, such as a lifetime mortgage, you will continue to own the property without making monthly payments (although some providers do allow you to make ad hoc or regular repayments to help reduce the total cost of borrowing). Instead, the amount of money you have borrowed and the additional compound interest is paid back from the sale of your home when you die or go into long-term care.
(This is slightly different to releasing equity with a home reversion plan, where you sell all or part of your home rather than taking out a loan against it.)
If there is any money leftover, it can be left as inheritance. However, there is likely to be less inheritance left over than if you had not taken an equity release plan, especially given the compound interest that is added over time to the total amount owed. That's why someone who wants to ensure there's a certain amount of money left for their loved ones might opt for inheritance protection.
How does inheritance protection work?
Some equity release products will offer an inheritance protection guarantee, which essentially allows you to ring fence a portion of your home’s value to guarantee an inheritance for your loved ones.
When the house is sold, the portion you chose to protect will pass on to your beneficiaries, no matter how much is outstanding on your loan. Let’s take a look at an example.
If you were to be able to release 60% of the value of your home worth £250,000, you may wish to take 40% as released equity (£100,000) and preserve 20% to leave behind as an inheritance for your loved ones.
That would mean that when your house is sold, at least 20% of the value would be left to your loved ones. The actual amount will depend on your home’s value when your loan is repaid.
In doing so, however, there are some important considerations you need to be aware of.
Important considerations with inheritance protection
- If you choose to protect a portion of your home’s value as inheritance, let’s say 30%, the maximum amount your provider will allow you to release will also be reduced by 30%. The larger the proportion protected, the lower the amount available to you as equity release.
- You are not protecting a static monetary amount, but a percentage of your home’s value. If your property’s value increases over time, the amount protected and inheritance left will also increase.
- Some providers may charge extra for including an inheritance protection guarantee. Make sure to check this if leaving an inheritance is important to you.
If you’d like to estimate how much money you could release from your home with a lifetime mortgage, use our equity release calculator.
How does inheritance protection impact Inheritance Tax?
Equity release can help to reduce your estate’s Inheritance Tax, as it is worked out based on the size of your estate. If a portion of the money has already been spent, it cannot be taxed.
The standard tax-free allowance for inheritance is £325,000 per person(www.gov.uk opens in a new tab), with an additional allowance for your main home of £175,000 per person. The protected inheritance will be included within this allowance and will be subject to the same rate of tax as usual if the amount left to beneficiaries exceeds the maximum tax-free allowance.
You can learn more about equity release, Inheritance Tax and ways to reduce it in our guide to the tax implications of equity release.
Equity release isn’t right for everyone. Your financial advisor will discuss alternatives to equity release with you to find the right solution for your unique circumstances and needs.
Further reading
- Is equity release safe?
- How much equity could I release?
- Equity release vs downsizing
- Why people choose to leave inheritance
If you’d like to learn more about how SunLife can help you plan for life after retirement, you can explore our wider services below:
The thoughts and opinions expressed in the page are those of the authors, intended to be informative, and do not necessarily reflect the official policy or position of SunLife. See our Terms of Use for more info.