Equity release and inheritance tax
In this article we look at what needs to be considered when valuing jointly owned assets that are subject to an equity release loan, for inheritance tax purposes.
Facts and analysis
Equity Release and Property Value for Inheritance Tax (IHT)
Two or more people can own property jointly; either as joint tenants or tenants in common. On the death of a joint tenant, ownership of their share in the property passes by survivorship to the surviving joint tenant(s). On the death of a tenant in common, their share in the property passes in accordance with their will or the rules of intestacy
It is possible to arrange equity release loans on either category of joint homeowner.
Where a share in the home passes on death to a surviving spouse or civil partner (either by survivorship or otherwise) that is generally an exempt transfer, and the value transferred is not relevant for inheritance tax (IHT).
Where the transfer is not exempt (where for example the share passes to children or to a long-term partner) then the value transferred is important, as IHT may be payable.
What is the value transferred?
In general, the value of any item for IHT purposes is the price which the property might reasonably be expected to fetch if sold in the open market at that time. This "open market price" will be reduced by the existence of another joint owner.
However, this reduction will not be allowed where the joint owners are husband and wife. This is because of the related property provisions in the IHT Act 1984, which treat the property of a married couple (or couple in a civil partnership) as a single unit rather than two separate items.
Mr A & Ms B own their home as tenants in common. Each has a 50% interest in the property, which has a total value of £300,000. Mr A dies, and his share of the property passes to his son. The value transferred for IHT purposes is £150,000 less a "discount" of between 5% and 15%, because HMRC accepts that the open market value of the half share is less than half of the total value of the property.
In their guidance on completing the IHT account, the Revenue states that in these circumstances the value transferred should be shown as 10% less than the "straight" proportionate value of the share, although the final value is still subject to their agreement.
Thus, the value entered on the IHT account is £(300,000 x 50% x 90%) = £135,000.Had Mr A and Ms B been married, no discount would be allowed.
What if there is an equity release loan?
If Mr A & Ms B had taken an equity release loan, that would produce a debt against the value of the property. The loan would be repayable on Ms B's death, and that would reduce the value transferred to the son (because the open market value of Mr A's share would be reduced).
The value transferred would have to be agreed between Mr A's executors and the Revenue. The starting point would be the £135,000 above, less half of the equity release loan outstanding at the time of the transfer. However, an adjustment would be needed to take account of the future interest accumulating under the loan
Of course, Mr A's & Ms B's estates are only reduced if the amount borrowed is no longer part of their estates i.e. if it has been spent or given away.
Where assets are held jointly, it is becoming increasingly common for the relationship between those owners to be other than husband and wife (registered civil partners). Additionally, the use of equity release is a common method of obtaining access to capital from an otherwise illiquid asset. In these circumstances, care needs to be taken when valuing those assets as part of providing advice on inheritance tax planning.
The information contained in this article has not been approved for use with customers and is based on Aviva’s interpretation of current law and legislation as at 6 April 2021. It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice. Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients. You should always seek appropriate legal or other professional advice.