The Impact of a Lifetime Mortgage on Inheritance Tax
A lifetime mortgage is a popular way for homeowners, over 55, to unlock equity from their property while continuing to live in it. Whether used to fund retirement income, home improvements, or support family members financially, a lifetime mortgage can provide significant benefits. However, it’s important to consider how it can impact inheritance tax (IHT) and the value of the property you leave behind.
How Does a Lifetime Mortgage Work?
A lifetime mortgage allows homeowners to borrow against the value of their property. Unlike traditional mortgages, there are no mandatory repayments, and the loan is repaid only when the homeowner passes away or moves into long-term care. While this can free up much-needed funds in later life, it also reduces the value of the property left to beneficiaries.
The Impact on Inheritance Tax
Inheritance tax is charged at 40% on estates worth more than £325,000, and up to £500,000 if you give your home to a child or grandchild. Since a lifetime mortgage reduces the net value of the property, because the outstanding loan is deducted before IHT is calculated, it can potentially lower the amount of tax payable. However, if the loan and collected interest significantly reduce the property value, it could impact what’s left to your heirs.
Planning Ahead
Gifting money to family before you die will likely reduce the value of your property. If the total value is worth less than £2m, and the property is left to a child or grandchild, a lifetime mortgage could bring the figure below important allowance thresholds. Each year you can gift up to £3,000 alongside £250 to as many individuals as you like, as long as they haven’t received part of the £3,000 gift allowance. For the gift to NOT be included as part of your property, you have to live for at least seven years after making the transaction.
While a lifetime mortgage can help manage inheritance tax liabilities, it’s crucial to plan carefully. Consider consulting with a tax specialist for personalised guidance, tailored to your specific situation.
Get in contact today to discuss your options and find the right approach for your future.