Eli Kosiner
Head of Mortgages
Benjamin Franklin once famously remarked that “nothing can be said to be certain but death and taxes”. Little did he know that these two factors might combine to create one of the leading financial planning concerns for wealthier families!
Inheritance Tax receipts in the UK hit a record high of £7.5 billion in the 2023/24 tax year – up £0.4 billion on the previous year – and are set to continue to rise sharply in coming years.
Indeed, a report from the Institute for Fiscal Studies (IFS) predicts that, by 2032/33, 1 in 8 people will have IHT due either on their death or their spouse or civil partner’s death.
While a strong estate plan will include many strategies for mitigating IHT, later-life lending may not be an option you’ve previously considered.
It’s a growing area of expertise, and here at HFMC we’re lucky to have experts who can provide tailored advice. So, read on to discover more about how releasing equity could help you to mitigate IHT issues.
Later-life lending can help to release capital and supports a gifting strategy
When clients approach us, it’s normally because they have a large estate and are concerned about potential IHT issues.
Without adequate planning, anything that exceeds the IHT nil-rate band (£325,000) and residence nil-rate band (£175,000 if you plan to leave your home to a direct descendant) could be liable for tax at a rate of 40%.
Gifting is a common strategy for mitigating IHT. Gifts will ordinarily fall outside the value of your estate if you survive for seven years after making them – these are known as “potentially exempt transfers”.
But how do you make gifts if your wealth is tied up in property?
While moving and downsizing was once thought to be the only way to release any of the value locked up in your home if you wanted to pass it on before you die, later-life lending can now be a valuable alternative.
Borrowing against your home can help you to release capital that you can then gift to your beneficiaries. Often you won’t have to make any monthly repayments as the interest will “roll up” until you die, sell the property, or move into long-term care.
Moreover, the value of your estate is reduced by the amount you gift – usually assuming you live for seven years. As the interest rolls up, this also creates a debt against your estate.
This can be particularly useful if the value of your estate is more than £2 million. At this threshold, the residence nil-rate band begins to taper, so if you can create a debt against your estate to reduce the value below £2 million, you will retain this useful IHT allowance.
An example of how later-life lending can help you to mitigate IHT issues
Here’s a simple example of how you and your family could use lending to reduce an IHT bill.
Our client is 75 years old. She was widowed two years ago, and her late husband left all of his wealth to her.
She owns a cottage worth £2 million and her assets are worth around £200,000. She has two sons who will be the sole beneficiaries of her estate.
Without any IHT planning her sons could be faced with a large IHT bill (£450,000 or more based on a £2.2 million estate).
Raising a lifetime mortgage of £1 million has allowed her to make gifts of £500,000 to each of her sons while still retaining equity of £1 million in case she needs to downsize or move into care. In return her sons have agreed to pay the interest on the lifetime mortgage each month, keeping it at £1 million.
Providing our client lives for at least seven years, these gifts will fall outside of her estate.
In addition, the remaining debt will reduce the value of her estate by £1 million. This will, in turn, reduce or even eliminate the IHT bill, saving somewhere between £400,000 and £500,000.
Get in touch
If you’d like to find out how our later-life lending approach could benefit you and your family, please get in touch.
Email or contact us on 020 7400 4700.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Think carefully before securing other debts against your home.
All figures and calculations are based on the tax rules at the time of publishing but may be subject to change. Speak to your financial planner for details of the latest nil-rate bands, limits, and other tax considerations.
