Figures published by the Equity Release Council shows activity in the Equity Release market grew by 24% in 2021, attributed to a growth in the number of High-Net-Worth (HNW) individuals using equity release as part of their financial planning. But why would HNW individuals want or need to borrow? Helen Barnes, Senior Advisor in the Later Life Finance team at Knight Frank Finance explains.
The cost of equity release has fallen dramatically from where it was five years ago, and HNW individuals are beginning to realise they can now access the wealth tied up in their property at low cost. Products have also evolved, with more flexible options than ever before. This has brought property wealth into broader discussions about family, tax planning, income and the future.
In the latest Wealth Report from Knight Frank, 49% of respondents reported transferring wealth to the next generation as one of the top five issues facing HNW and UHNW individuals. Those with significant residential property wealth (i.e. over £5 million) might consider borrowing through a lifetime mortgage (the most common form of equity release) in order to pass wealth down to their children and grandchildren. This is often used by the younger generations to purchase property, or to enhance their buying power and move to a larger property, so the wealth is effectively remaining in residential assets but moving between generations.
Property wealth can be used to top up income. “We recently helped a HNW client who had been drawing down from considerable funds in a SIPP,” says Helen. “He wanted to help his children and grandchildren financially. However, as a higher rate taxpayer, any additional funds drawn from the SIPP were costing him at least 40% in tax (pension income from drawdown is taxed at your marginal rate). By setting up a lifetime mortgage, we have given him the option of drawing funds from his property wealth instead, either as a lump sum (perhaps for gifting to family members) or as a regular top-up to his income. Not only are the mortgage funds not subject to income tax, but borrowing rates available today are still below 3%. Our client and his Wealth Manager can now make flexible decisions on the most tax-efficient, cost-effective source of funds.”
"We are also seeing an increasing number of individuals borrow to enhance their lifestyle, from things like home improvements, buying holiday homes, tidying up other debts so they have more disposable income, or to help other family members," says Helen.
For HNW individuals, equity release is also becoming a key estate planning tool, as creating debt in order to gift money can lead to Inheritance Tax savings. Helen explains: “We are working alongside a growing number of trusted professionals, including Lawyers, Family Offices and Wealth Managers, to assist them in estate planning for their clients who are normally in their 70s. For those with property wealth of over £2 million, creating a debt against their main residence and then gifting that money away can be an efficient way of reducing the potential Inheritance Tax bill their beneficiaries will eventually face. The overlap between equity release advice and financial planning advice requires careful input from two sets of experts in order to tailor the advice for each client’s particular circumstances. It is clear this is a very powerful financial planning tool.”
Helen Barnes has over 30 years’ experience in Equity Release and is a Senior Advisor in Knight Frank Finance’s Later Life Finance team. For more information, contact Helen directly on 01483 963889 or email helen.barnes@knightfrankfinance.com.