Can a lifetime mortgage help with inheritance tax planning?
In some circumstances, a lifetime mortgage can play a role in wider inheritance tax planning by helping release funds from property that can then be gifted during lifetime. This is a complex area and not suitable for everyone, but where most of a person's wealth is tied up in their home, it can sometimes form part of a broader estate-planning strategy.
Specialist advice on lifetime mortgages, later life lending and wider home finance, designed around your circumstances.
Why this issue arises
Many families understand the basic inheritance tax principle that gifts can, in the right circumstances, fall outside of the donor's estate after seven years. The difficulty is that for many people, a large proportion of their wealth is tied up in their home rather than sitting in cash or investments.
That can create a problem. A client may want to make gifts during lifetime, but not want to downsize, disrupt their lifestyle, or deplete liquid savings. In some cases, a lifetime mortgage may provide a way to release tax-free cash from property so that gifting can happen sooner rather than later.
Everybody has a standard £325,000 IHT threshold (and if you are leaving your main residence to direct descendants you will have an additional £175,000 Residence Nil Rate Band allowance). If married, when one of you passes away your estate can pass to the survivor without any Inheritance Tax triggering then (the liability passes across to the survivor who will also benefit from the deceased's allowance too, with IHT triggering when the survivor passes away).
After you pass away your beneficiaries may have to pay 40% of anything above this combined £500,000 threshold (if single) or £1,000,000 threshold (if married), and this usually has to be paid before they inherit your estate. Therefore, if your NET estate value (total value, less any debts) was £1,500,000 when you pass away, your beneficiaries may need to pay HMRC £400,000 in IHT if you were single, or £200,000 if you were married, before they are able to inherit your estate (40% of £500,000 or £1,000,000).
Therefore, in simple terms, for every £100,000 of extra debt you can allow to roll-up against the estate (or for every £100,000 you gift to beneficiaries now, assuming you live 7 years), you could offset £40,000 in IHT liability that otherwise would have been charged.
How a lifetime mortgage could form part of a wider plan
A lifetime mortgage allows a homeowner aged 55 or over to release tax-free cash from their home while continuing to live in it. In the right circumstances, some of those released funds may then be gifted to beneficiaries.
If the gift falls outside the donor's estate under the relevant inheritance tax rules, the net value of the estate subject to inheritance tax may reduce. At the same time, the lifetime mortgage debt and any accrued interest also reduce the net estate remaining in the property.
This does not mean the strategy is automatically right or cost-effective in every case. The balance between interest costs, estate reduction, family objectives and long-term outcomes has to be considered carefully.
This is a simplified illustration only. The actual outcome depends on many factors, and specialist advice should always be taken before proceeding.
A worked example
The following is a simplified illustration to help explain how the concept works in practice. The exact figures are for illustration only and would depend on individual circumstances.
Objective: reduce future inheritance tax exposure without downsizing or depleting liquid savings.
A client with most of their wealth tied up in their home may be concerned that their estate could face a significant inheritance tax liability in the future. By releasing part of that property wealth through a lifetime mortgage and gifting the funds, they may be able to reduce the taxable value of the estate over time, subject to the relevant gifting rules and survival periods.
For example, if the client were to release £200,000 through a lifetime mortgage and gift this sum to their adult child, the gift may fall outside the estate after seven years (subject to certain conditions). Meanwhile, the £200,000 mortgage debt, plus any accrued interest, would reduce the net value of the property remaining within the estate.
Impact on your estate
A lifetime mortgage can reduce the equity in your property, reducing the net estate size, thereby reducing the inheritance tax your estate may otherwise be subject to. Although this may reduce the eventual inheritance your beneficiaries receive, by gifting an advance of their inheritance now, which they can benefit from during your lifetime and which may grow in value outside the donor's estate, your beneficiaries may actually be better off long-term due to the inheritance tax that may be mitigated.
It is important that all family members who may be affected understand the implications. We strongly recommend open family conversations, discussing the benefits and implications with an inheritance tax and estate-planning specialist, before proceeding with any plan.
This example is portrayed on the assumption that a married couple release and gift £400,000 from their property and gift away these funds as a 'potentially exempt transfer (PET)' to their beneficiaries. It does not factor in the roll-up of interest against the property which may mitigate IHT further, nor does it consider the growth of any investment that the recipients of the amount gifted may benefit from outside of the donor's estate.
This is for informative purposes only, and does not constitute tax or estate planning advice.
Important considerations before proceeding
This kind of planning should never be approached in isolation. A lifetime mortgage may help in some situations, but it also introduces long-term borrowing, interest costs and a reduction in estate value. That has to be weighed carefully against the potential inheritance tax benefit and the family's wider objectives.
The impact on beneficiaries, future flexibility, health, care planning, property intentions and wider asset structure all need to be considered properly. In many cases, mortgage advice should sit alongside legal, tax and estate-planning advice.
- A lifetime mortgage will reduce the equity remaining in the property.
- Interest will usually build up over time unless repayments are made.
- The strategy may affect what beneficiaries eventually inherit.
- Family discussions are strongly recommended.
- Tax and legal advice should be taken separately before any decision is made.
Why specialist advice matters
This is not simply a question of whether a lifetime mortgage is available. The real question is whether using one in this way makes sense once the mortgage cost, family objectives, estate-planning priorities and tax position are all considered together.
RightHomes Equity Release can help clients explore whether a lifetime mortgage may be worth considering as part of that wider picture, while making sure the client also understands the need for specialist tax and legal input before moving forward.
Who this type of discussion may be relevant for
- Homeowners aged 55 or over with substantial wealth tied up in property.
- Clients who want to explore gifting during lifetime.
- Families concerned about a future inheritance tax liability.
- Clients who do not want to downsize or use up liquid savings first.
- People who want to compare this strategy with other estate-planning options.
Would you like to explore whether this could be relevant to you?
If you are thinking about inheritance tax, gifting and the role property wealth may play in your wider plans, the next step is to have a proper conversation. RightHomes Equity Release can help you understand whether a lifetime mortgage may be relevant to your situation and what other specialist advice should sit alongside that discussion.
Specialist advice on lifetime mortgages, later life lending and wider home finance, tailored to your circumstances.
Frequently asked questions
No. A lifetime mortgage is not a standard inheritance tax solution and should not be treated as one. It may be relevant in some circumstances as part of a broader estate-planning discussion, but it is not suitable for everyone.
Not necessarily. Whilst many people have used lifetime mortgages as a way of raising the funds required to meet their estate planning and IHT mitigation objectives, the outcome depends on your wider estate, the gifting structure, how long you survive after making gifts, and the cost and effect of the lifetime mortgage itself. This is why tax, estate planning and legal advice are an essential part of the holistic process.
Whilst not a mandatory requirement, it really is vital. Mortgage advice is only one part of the picture. If you are considering this type of strategy, separate tax, legal and estate-planning advice should also be taken, to ensure your IHT mitigation strategy is well thought out and considers the ever changing regulatory and fiscal environment we are in.
A fee may be charged for mortgage advice. The exact amount will depend on your circumstances, however will usually be; £1,495 for lifetime mortgages, £995 for complex residential and later life mortgages, and £595 for straight forward residential and later life mortgages.
The guidance and/or advice contained within this website is subject to the UK regulatory regime and is therefore targeted at consumers based in the UK.