The advantages and risks of equity release for business owners

As the owners of successful businesses, your clients have weathered many storms. The Covid-19 pandemic is likely to have knocked the wind from their sails somewhat, but happily, their companies survived this difficult time and came back fighting.

Now, a new challenge faces business owners: the cost of living crisis.

From the Bank of England (BoE)’s seven consecutive base rate rises since December 2021, to the 40-year high in inflation, the UK’s economic landscape has proved volatile in 2022.

Plus, at the end of September, former chancellor Kwasi Kwarteng announced a set of tax cuts that caused the pound to plummet sharply, sparking further distress for individuals and businesses alike.

As both company owners and homeowners, your clients could be feeling doubly concerned about how to keep both their business and personal finances afloat this winter.

One option they may be considering, in order to bolster their personal spending power in the coming years, is equity release.

Releasing equity from your home involves taking out a loan against part of the value of your home, which is subsequently repaid with interest when you sell the property or when you pass away.

Read on to find out the advantages and risks of equity release as a company owner, so your clients can make informed decisions about their financial futures.

2 key advantages of equity release for business owners

1. Equity release could stabilise your clients’ personal income

Paying yourself a sustainable income is an important part of running an enterprise – but it can also place financial pressure on any company.

If your clients are searching for ways to save on business expenditure to mitigate the effects of the cost of living crisis, releasing equity from their home could be a viable solution.

Receiving either a steady income or a lump sum payment from a lender could enable them to reduce the salary they pay out of their company budget, while maintaining the lifestyle they are used to.

2. Equity release may reduce your clients’ financial stress

While the cost of living crisis is likely to have an impact on your clients’ wealth, it is easy to forget how much it could affect their health, too.

Indeed, a study published by FTAdviser found that, in 2022, 56% of adults now say money is the greatest cause of stress in their lives, while 23% admitted to losing sleep over financial anxiety.

By boosting their income using equity release, your clients’ financial worries could be dampened for a time.

This soothing of their anxieties might help them focus on steering their business through this rocky time while taking care of their mental health, too.

2 risks to consider when releasing equity as a business owner

1. Taking on more debt could put your clients’ wealth at risk in future

While releasing equity from their home can bring material benefits in the short term, remember: your clients are still taking on debt that, eventually, needs to be repaid.

The great thing about equity release is that borrowers are usually not required to repay the loan until they pass away or sell the property. However, when they have a personal stake in their company, it is important for clients to consider how and when they are able to manage any debt they take on.

Indeed, without proper consideration of the interest their loan may accrue, and its impact on their personal wealth (that, in turn, may have a knock-on effect on their business), your clients may bite off more than they can chew.

If your clients also have business loans that need to be repaid, for example, equity release could have a “double whammy” effect down the line when they pass away or sell their assets.

2. Equity release can reduce your clients’ access to means-tested benefits

Although equity release can boost spending power, it can affect your clients’ access to means-tested benefits, especially later in life.

Two crucially affected benefits are Pension Credit and Council Tax Reduction.

While a State Pension won’t be affected by taking equity release, additional Pension Credit – which can increase weekly payments to £177.10, or £270.30 if you have a partner – can be negatively affected by equity release.

Similarly, if your clients are eligible for a Council Tax reduction, this eligibility could be reduced or nullified by releasing equity. For more guidance on how their Council Tax might be affected, your clients should contact their local council.

Although losing certain benefits now might not seem significant, the importance of looking ahead to their retirement – and how both their corporate and personal wealth will factor into it – shouldn’t be underestimated.

If your clients are considering equity release, we can help them review their options and assess the viability of this decision.

Get in touch

If your clients are concerned about their personal wealth, and its knock-on effect on their company, it could be wise to put them in touch with us today.

Email enquiries@prosserknowles.co.uk or call 01562 829 222.

Please note

Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.