For many homeowners, their property is their biggest financial asset. Over the years, rising property values may have increased their wealth, but much of that money remains tied up in their home.
At the same time, some families are becoming increasingly concerned about inheritance tax and how much of their estate they may eventually pass on to loved ones.
This raises an interesting question: could borrowing against your home in later life help you support your family now, while potentially forming part of your inheritance tax planning?
The answer depends on your circumstances. There may be options worth exploring, but there are also important costs, risks and tax considerations.
Understanding inheritance tax and your property
Inheritance tax is generally charged at 40% on the value of an estate above the available tax-free thresholds, after taking account of applicable exemptions and reliefs.
The standard inheritance tax nil-rate band is £325,000 per person. An additional residence nil-rate band of up to £175,000 may also be available when a qualifying home passes to direct descendants, subject to the relevant conditions.
For married couples and civil partners, unused allowances may be transferable, potentially allowing qualifying estates to benefit from combined thresholds of up to £1 million.
Not every estate will qualify for these allowances in full, and inheritance tax rules can change.
For homeowners whose property represents a significant part of their wealth, it may be worth reviewing their estate planning arrangements.
How could borrowing in later life fit into the picture?
Later-life lending provides ways for eligible homeowners to access money secured against their property.
One option is a lifetime mortgage, a form of equity release generally available to homeowners aged 55 and over.
A lifetime mortgage allows you to borrow against the value of your home while retaining ownership. Depending on the product, you may be able to make voluntary repayments or allow interest to accumulate.
Some homeowners consider using released funds to help children or grandchildren with major financial commitments, such as purchasing a first home.
Where money is gifted during someone's lifetime, inheritance tax rules may become relevant.
However, it is important to understand that taking out a mortgage and making a gift does not automatically reduce inheritance tax. The treatment of the gift and any outstanding borrowing needs careful consideration.
What is the seven-year gifting rule?
Under current inheritance tax legislation, many outright gifts to individuals are classed as potentially exempt transfers.
Generally, if you survive for seven years after making a qualifying gift, that gift will fall outside your estate for inheritance tax purposes.
If you die within seven years, the gift may still be taken into account when calculating inheritance tax.
There are also exemptions for certain gifts, including an annual gifting exemption and, subject to conditions, regular gifts made from surplus income.
Importantly, special rules can apply where borrowed money is used to make gifts. The tax treatment of any outstanding mortgage debt must be considered separately, and it should not be assumed that the loan will automatically be deductible from the estate.
A qualified inheritance tax specialist can explain how these rules may apply to your individual circumstances.
Could you help your family sooner?
For some homeowners, the main motivation for releasing equity is not necessarily tax planning.
It may simply be the opportunity to help loved ones at a time when the money could make a meaningful difference.
This could include contributing towards a deposit for a first home, helping with education costs or providing financial support to family members.
Rather than waiting until an inheritance is received, some people prefer to see their family benefit during their lifetime.
Nevertheless, your own financial security must come first. Any gift funded through borrowing should be affordable in the context of your long-term retirement plans.
What are the risks?
Borrowing in later life is a significant financial commitment.
With a lifetime mortgage, interest may be added to the amount borrowed. If it is not paid, interest can compound, meaning the outstanding debt can increase substantially over time.
This reduces the equity remaining in your property and may reduce the inheritance available to your beneficiaries.
There may also be early repayment charges, restrictions on future borrowing and implications for means-tested benefits or future care funding.
It is therefore essential to consider whether the overall cost of borrowing could outweigh any potential inheritance tax benefit.
Is a lifetime mortgage the only option?
Not necessarily.
At Search Equity Release, we believe it is important to explore the available later-life lending options rather than assume equity release is automatically the right answer.
Depending on your age, income and circumstances, alternatives may include retirement interest-only mortgages or other residential mortgage arrangements designed for older borrowers.
Some of these options require regular monthly payments and are subject to affordability assessments.
In other situations, borrowing may not be appropriate at all.
Getting the right advice
Inheritance tax planning involves more than simply calculating the value of your home.
It requires an understanding of your wider estate, family circumstances, available allowances and long-term objectives.
At Search Equity Release, we provide specialist advice on later-life borrowing, including lifetime mortgages and retirement mortgage options.
Where inheritance tax planning is being considered, we can also refer you to an appropriate specialist for advice on the tax implications.
Our aim is to help you understand your borrowing options, their costs and their potential impact on your future financial wellbeing.
Talk to Search Equity Release
If you are considering using property wealth to help your family, or would simply like to understand your options in retirement, we are here to help.
Our initial consultation is free and without obligation.
We will take time to understand your circumstances, explain the available options and help you consider whether later-life borrowing is appropriate.
Speak to Search Equity Release on 0113 403 5584 or visit our contact page to arrange a conversation.
Important information
This article is intended for general information only and does not constitute personal financial, mortgage, legal or tax advice. Tax treatment depends on individual circumstances and may change.
