Pandemic perspective driving equity release as homeowners look to avoid inheritance tax

Research from debt advisory specialists, Henry Dannell, suggests that it’s not just a quick cash hit that is driving equity release across the UK market, as a post-pandemic perspective spurs homeowners to avoid being hit by inheritance tax.

London is leading the way when it comes to the value of equity being released from a property. In 2021, the average value released was £222,060, up 36% from the previous year, the largest increase of all areas of the UK. The South East (£127,298) and South West (£104,960) also saw the second and third largest levels of equity released from the average home. 

With a combined total of 18,814, these three regions also accounted for the highest volume of equity release plans in 2021 – 45% of the UK total.

They also saw the highest total value of equity release plans in 2021, totalling almost £2.7bn – 61% of the UK’s total value.

Previous analysis by Henry Dannell found that ‘cash hungry homeowners’ squeezed almost £5bn out of their homes in 2021, but it seems it’s not just the financial squeeze that is pushing homeowners to draw equity from their properties. 

Across the UK, the average value of a home utilising equity release was £358,051 in 2021, some way above the £325,000 inheritance tax free threshold set by the government. However, the average value released was £104,794 bringing the value of the proportion owned to just £253,257 – making it tax exempt in the process. 

In the South East the average value of a property releasing equity was £448,089 in 2021, while in the South West, it was £365,397. The only two regions other than London where the average value of a home utilising equity release sat above the initial £325,000 inheritance tax free threshold. 

But with the average homeowner releasing equity to the tune of £127,298 in the South East and £104,960 in the South West, homeowners in both regions saw their proportion of ownership fall comfortably below this tax free threshold. 

In the same year, the average value of homes releasing equity in the capital sat at £721,547, £211,445 above the current London average (£510,102). 

However, with the average London homeowners drawing £222,060 via equity release, this would bring the total value of the asset owned to £499,487, just below the £500,000 inheritance tax free threshold at which you can gift your property to a child or grandchild. 

Director of Henry Dannell, Geoff Garrett, commented:

“The immediate benefit of equity release is, of course, the ability for homeowners to draw cash from the value of their home to help overcome periods of financial hardship or to fund those well earned retirement plans. 

However, it’s also a great way of ensuring that your estate is as efficient as can be with regard to inheritance tax. This is a factor that has come to the forefront for many homeowners with a view of what they leave, and to whom, following the pandemic and its reminder about the unpredictability of life.

By drawing equity from their home, they can reduce the value of their estate and, in many cases, ensure that it falls below the tax thresholds associated with inheritance tax, financially benefiting those that stand to inherit it. 

Of course, they also get the benefit of the equity released and the ability to enjoy their golden years – something we’re seeing at all levels of the market, but particularly in the more inflated areas of the market where homeowners stand to pay the most inheritance tax if left unaddressed.”

Author

Data Tables

Equity release data sourced from the Equity Release Council and Key Market Monitor.