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a married couple researching Lifetime mortgages & inheritance tax

Author Paul Murphy -Later Life Finance Ltd

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Lifetime Mortgages and Inheritance Tax: Preserving Your Wealth

When considering the benefits of a lifetime mortgage to unlock the equity wealth in your home, it’s natural to think about the long-term implications, especially regarding your estate and inheritance tax (IHT). Many homeowners want to ensure their loved ones are provided for, and understanding how equity release affects inheritance tax is a crucial part of responsible financial planning.

At Later Life Finance, we provide comprehensive, independent advice to help you navigate these complex areas, ensuring you make informed decisions that align with your family’s future.

Whether you need a remortgage, are exploring whether equity release reduces inheritance tax, or are simply looking for a cash injection for your retirement, mortgages for older borrowers offer flexible solutions. 

We explore the options available to older borrowers, including lifetime mortgages and retirement mortgages, and provide a full mortgage broker service to review the range of flexible mortgages for older people in London. 

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Understanding Lifetime Mortgages and Inheritance Tax

A lifetime mortgage is the most common form of equity release, allowing you to release tax-free cash from your home while retaining ownership. The loan, plus any accrued interest, is typically repaid from the sale of your property when you (and any joint borrower) pass away or move into long-term care. 

The key question often arises: “Does equity release affect inheritance tax?” The answer is nuanced, but generally, equity release in IHT planning can be a powerful tool if used strategically.

The growing range of flexible lifetime mortgage providers and retirement mortgages available offer a diverse range of options for raising tax free wealth from your home. 

To discover how much can I borrow on a lifetime mortgage , our experts will review the whole market to source the best deal for your specific needs and priorities. 

How a Lifetime Mortgage Can Impact IHT

Inheritance Tax is levied on the value of your estate (your assets minus your debts) above a certain threshold (the Nil Rate Band). Here’s how a lifetime mortgage can play a role in inheritance tax equity release:

  • Reducing Estate Value: The most direct way a lifetime mortgage can help with IHT is by reducing the value of your estate. When you take out a lifetime mortgage, you are creating a debt against your property. This debt is deducted from the value of your home when calculating your estate for IHT purposes. This directly addresses the question of “does equity release reduce inheritance tax
  • Example: If your home is worth £500,000 and you take out a £100,000 lifetime mortgage, the net value of that asset for IHT purposes (assuming no other changes) effectively becomes £400,000.
  • Gifting Funds: Many people use the tax-free cash from a lifetime mortgage to make gifts to family members during their lifetime. If these gifts are made seven years before your death (known as a Potentially Exempt Transfer, or PET), they fall outside your estate for IHT purposes. Even if you pass away within seven years, the amount of IHT payable on the gift reduces on a sliding scale (taper relief).
  • This can be particularly beneficial if your estate is likely to exceed the IHT threshold, offering a strategic approach to equity release and inheritance tax planning.
  • Funding Lifestyle or Care: Using the released funds for your own needs, such as home improvements, a dream 60th Birthday Cruise, or even future care costs, means that money is spent during your lifetime and therefore doesn’t form part of your estate upon death. This indirectly reduces your estate’s value for IHT. There is generally no specific “tax on equity release” itself, as the equity release mortgage funds are released on your main residence and not income.
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Important Considerations for IHT Planning with a Lifetime Mortgage

  • While a lifetime mortgage can be a valuable IHT planning tool, it’s essential to consider:

    • Accruing Interest: The interest on a lifetime mortgage typically rolls up, meaning the total debt increases over time. This reduces the equity left in your home, which in turn reduces the potential inheritance for your beneficiaries. However, this also reduces the net value of your estate for IHT purposes, which is part of how equity release affects inheritance tax.
    • Voluntary Payments: Some modern lifetime mortgage plans allow you to make voluntary interest payments or ad-hoc capital repayments. This can help to manage the growth of the loan and preserve more of your home’s value for your heirs, but it might lessen the IHT benefit if your primary goal is estate reduction.
    • No Negative Equity Guarantee: All reputable lifetime mortgages come with a “No Negative Equity Guarantee.” This ensures that you will never owe more than your home is worth, protecting your beneficiaries from inheriting a debt greater than the property’s value.
    • Impact on Benefits: Releasing a lump sum of cash could affect your eligibility for means-tested state benefits.
    • Professional Advice: This area is complex. It’s crucial to seek advice from a specialist financial adviser who understands both equity release and inheritance tax planning, as well as an independent solicitor. They can help you understand the full implications of how equity release affects inheritance tax in your specific situation.

Example Case Study Using A Lifetime Mortgage For Inheritance Tax Planning

  • Joint borrowers aged 75 and 76 in Harrogate
  • Existing interest only mortgage ending
  • Home valued at £850,000
  • Require a lump sum of £100,000 plus £50,000 for home improvements 
  • Would like access to a drawdown facility for the future 
  • Prefer to pay interest monthly but don’t want any contractual commitment for security and peace of mind
  • Solution-Drawdown lifetime mortgage with voluntary repayments to manage the interest. Access to a lump sum with £80,000 drawdown facility for future use, if needed. 
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How Later Life Finance Can Help

At Later Life Finance, our expert advisers are well-versed in the intricacies of lifetime mortgages and their interaction with inheritance tax. We will:

  • Conduct a thorough review of your financial situation and estate.
  • Discuss your goals for your legacy and your family.
  • Explain how a lifetime mortgage could fit into your broader estate planning strategy, including its role in equity release and inheritance tax considerations.
  • Help you compare options from a wide range of lenders to find a solution that balances your current needs with your future inheritance goals.

Our advisers are ready to provide the clear, unbiased advice on the full range of later life mortgages available. 

Contact us today for a free, no-obligation consultation to explore how a lifetime mortgage could help you with your inheritance tax planning.

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Lifetime mortgage FAQs

The amount you can release on a lifetime mortgage is usually between 20% and 50% of the home's valuation. This is based on the age of the youngest homeowner and the property type.
If you need to raise more money and have no remaining Drawdown (reserve) Facility, you may be able to take a Further Advance from your lifetime mortgage. This is additional borrowing on top of your existing lifetime mortgage and is subject to the valuation of your home and the balance on your lifetime mortgage.
Equity release companies who adhere to the Equity Release Council codes of conduct offer the option to transfer your lifetime mortgage to a new property if you decide to move. However, certain conditions must be met for the new property to be considered "suitable." A suitable property refers to one that is deemed marketable by the equity release company in the future. For instance, if the new property is located in a flood-prone area, the transfer of the lifetime mortgage may not be permitted. In the case of downsizing to a property of lesser value, you might be required to repay a portion of your lifetime mortgage to facilitate the transfer.
In the case of a lifetime mortgage, you generally do not need to make monthly repayments since the loan, along with the accumulated interest, is settled when your home is eventually sold. Your lifetime mortgage adviser will provide detailed projections of how much you will pay back based on whether you opt to make payments or not.
In the event of you passing away shortly after obtaining a lifetime mortgage, the interest accrued would not have significantly accumulated, resulting in a smaller growth of the debt. If no other homeowner is listed on the lifetime mortgage, the lender requires the mortgage to be settled within 12 months of you passing away. The executors of your will sell the property and utilise the proceeds to settle the debt. The beneficiaries of your estate may opt pay off the debt using cash or a new mortgage and retain ownership of the property. This will depend on factors including your wishes set out in your will, and on whether the property is to be retained or sold, with any remaining equity divided by your beneficiaries. 
Equity release lenders who are a member of the Equity Release Council provide a no-negative equity guarantee. This ensures you will never be required to repay more than the proceeds from the sale of your home to settle the debt. In other words, the lender cannot pursue you for any shortfall between the debt amount and the sale proceeds. This protection is made possible by the no negative equity guarantee, which is upheld by all members of the Equity Release Council. According to this guarantee, the lender is strictly limited to requesting only 100% of the sale proceeds as repayment. They are not permitted to seek additional payment from you, your estate, or your estate beneficiaries.
A typical rate for a lifetime mortgage typically falls between 5.9% and 7%. That said, your rate may be different depending on factors like your loan-to-value ratio and the features included in your plan. It’s important to compare the features of different plans to find the one that best fits your needs.
Lifetime mortgages come with a few risks, such as the possibility of owing more than the value of your home due to accumulated interest. They also require monthly fees and can significantly reduce the amount of inheritance you can pass on to family members. Ultimately, it’s important to consider all of these factors when deciding if a lifetime mortgage is the right choice for you.
Lifetime mortgage interest rates are typically based on your age, the amount of money you need to borrow, and the value of your property. Generally speaking, the older you are and the less you borrow, the lower the rate you can expect. Drawdown lifetime mortgages have interest rates set at the time of further borrowing, whereas the initial lump sum is determined at the time of arranging the plan. So be sure to research what’s out there before making a decision.
Yes, you can pay off a lifetime mortgage early, but there may be fees associated with doing so. Providers have varying levels of early repayment charges which your equity release adviser will discuss with you to ensure you have access to all your options and understand the features and charges. It is best to check with your provider before you decide on the repayment plan.
Lifetime mortgages come in several forms, including lump sum, drawdown and interest-only plans. Each offers different rates and repayment arrangements, so your adviser can tailor the mortgage to meet your needs. Later Life Finance provides access to the whole lifetime mortgage market. We will explain the features, costs and points to consider of each option. This will help you make a balanced decision on the right solution for you.
You can repay an interest-only mortgage with an equity release plan. Lifetime mortgages are the most popular form of equity release and allow optional repayments of interest charges, if you wish. Since monthly repayments are voluntary with a lifetime mortgage, your home is not at risk of repossession if you do not maintain monthly payments.Therefore these plans can be more suitable into retirement years.
An interest-only lifetime mortgage is a type of equity release plan where you can pay the interest off on a monthly basis. This avoids compound interest being added which stops the loan from increasing. This type of mortgage is popular for homeowners who want to maintain equity in the home for inheritance or downsizing purposes.