Exploring equity release and intergenerational wealth transfer

Can equity release be used to pass wealth to the next generation?

Written in line with our editorial policy.

There are many common reasons for accessing your property wealth, with paying off the mortgage and making home improvements just two of the main motivations. But did you know that gifting money to family members, or ‘intergenerational wealth transfer’ has long been a top reason for homeowners to access their tax-free cash?

After working all your life to pay off your home, the thought of selling up can be upsetting should you want or need to access your property wealth. If you’d like to provide some financial help to your children or grandchildren, but can relate to being ‘asset-rich, cash-poor’, perhaps equity release could be an option.

To help you decide if a plan could help you to achieve your financial goals in supporting your family financially, we’ll be discussing:

• What is equity release?
• What is intergenerational wealth transfer?
• How do equity release and intergenerational wealth transfer work together?
• Is equity release an effective way to transfer wealth to my family?
• Benefits of equity release and intergenerational wealth transfer
• Drawbacks of equity release and intergenerational wealth transfer
• Speak to an equity release specialist

After you have read our guide to equity release and intergenerational wealth transfer, you’re welcome to call us on 0808 178 3055, or request a call back and we’ll be happy to help further. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock.

What is equity release?

Equity release enables homeowners aged 55 and over to unlock a tax-free cash lump sum from the value of your home. The money you release can be spent however you wish, though you must first pay off any outstanding mortgage on your home. 

There are typically no monthly repayments to make on a lifetime mortgage, as the interest can be left to roll up over the life of your plan. If you want to reduce the amount of interest that accrues, you can choose an interest-only plan or make ad hoc payments when you can afford to.

When you pass away or move into long-term care, the money from the sale of your home will repay your loan plus interest.

What is intergenerational wealth transfer?

Intergenerational wealth transfer is the process of transferring your assets from one generation to another. You can do this in many different ways, such as:

• Leaving an inheritance.
• Gifting your wealth during your lifetime.
• Setting up trusts.
• Arranging life insurance policies.

Of course, there are pros and cons to each of these methods. Seeking advice from a qualified financial adviser will ensure you are making the right decision for you, your family and your finances.

How do equity release and intergenerational wealth transfer work together?

If you own your home with little or no mortgage left to pay on it, but find yourself living on a smaller income than you’d like, you may relate to the feeling of being ‘asset-rich, cash-poor’. Many of us in or approaching retirement own lovely houses, but our finances are not always so impressive. This can be problematic if you have family members in need of financial support.

This is when equity release and intergenerational wealth transfer so often come together. There can be many reasons you might want to pass on some of your wealth to the next generation with equity release:

• Gifting a deposit for a home to get on or move up the property ladder.
• Helping to pay for a family wedding.
• Paying for university fees.
• Financial support to help with crippling loans or credit cards.
• Wanting to see your loved ones enjoy their inheritance now, while you’re still here.

By arranging a lifetime mortgage or home reversion plan, you may be able to access your tax-free property wealth now, to pass on to the next generation when they need it most.

You can read more about equity release and inheritance here.

Is equity release an effective way to transfer wealth to my family?

Many later life homeowners want to ensure our hard-earned money will one day go to our children, but some want to do it now, while they’re here to see it being enjoyed. If you don’t want to wait until you pass away for your loved ones to benefit from your property wealth, equity release is certainly an option to consider.

But is equity release the right option for you? You’ll need a qualified equity release adviser to answer that for you. In the meantime, it might be worth running through your financial alternatives first. 

The reason for this is that equity release can work out as an expensive way to borrow money, which can make it less effective as an intergenerational wealth transfer tool than other options.

Alternatives to equity release for intergenerational wealth transfer

Equity release may be a solution for you if none of the alternatives suit your current wants and needs. These include:

• Downsizing your home to a smaller or less expensive property.
• Using your savings.
• Arranging a mortgage, retirement interest-only mortgage or a remortgage.
• Taking out a loan.

As equity release can be an expensive way to borrow money, it is always recommended you explore all your available options first before making a decision. During your equity release appointment, your adviser will discuss this with you and go through all your options, some of which you might not have considered yet. 

 You can read more about the alternatives to equity release here.

Benefits of equity release and intergenerational wealth transfer

Giving your family a ‘living inheritance’ now, so you can see them enjoy their money, can bring a great deal of joy and peace of mind to all involved. If you have loved ones struggling to get on or up the property ladder, or living with the burden of loans or credit cards, you may be very keen to help them.

A main benefit of equity release is that you won’t have to make any mandatory repayments on the loan, as the interest can be left to roll up on your plan. This means you can unlock the money you and your family need, without your monthly disposable income being reduced by loan repayments. You could even use some of the money to boost your own day-to-day finances, too.

As equity release will reduce the value of your estate, it may also reduce your inheritance tax liability. This means your loved ones could pay less inheritance tax, or none at all when you pass away. However, the usual seven-year-rule regarding inheritance tax still applies, so if you pass away soon after gifting your money, they may have to pay an inheritance tax bill.

Drawbacks of equity release and intergenerational wealth transfer

In terms of arranging equity release for intergenerational wealth transfer, the main issue is the effect of compound interest which applies to all lifetime mortgages. If left to roll up each month or year, the interest can grow quite quickly over time.

This means a plan will reduce the amount of inheritance you leave for your family when you pass away or move into long-term care. If you want to ensure as much of your money goes to your family as possible, alternatives such as downsizing or using your savings could be a better option for you. 

To prevent or reduce the interest from accruing on your plan, you could choose an interest-only lifetime mortgage. If your family is keen to protect their inheritance from being affected by interest, they may even offer to make the repayments themselves.

There are other drawbacks to equity release too, which you can read more about in our article pros and cons of equity release.

Speak to a specialist

We hope this article has answered some of your questions about equity release and intergenerational wealth transfer. Our selected advisers are also available to discuss your circumstances and offer further information and advice. 

Just call us on 0808 178 3055 or request a call back and we’ll arrange a no-obligation appointment for you.