1. Simon's story

    Simon is 68 and in a bind. He divorced his wife of 33 years shortly before he retired. This became costly to his pension share and investments. He decided to keep the family home, so he now has a property worth £750,000 and fixed interest investments of £200,000. He uses these to supplement his pension.

    His only child, Sarah, has recently given birth, and is desperate to upsize from the one bedroom flat she currently owns. Ideally, she needs £200,000.

  2. Simon would like

    Simon would like to help and understands the tax benefits of making lifetime gifts. But he cannot afford to give away any of his capital. He decides to take £200,000 in a lifetime mortgage at an interest rate of 3.11% AER. If Simon dies 18 years later, at age 86, his ONS life expectancy, then this would be Sarah’s inheritance, based on the assumptions below:

     

    Table
      No mortgage (£) Lifetime Mortgage (£)
    Value of property 1,071,185 1,071,185
    Outstanding loan - 349,370
    Net property value 1,071,185 721,815
    Investments 200,000 200,000
    Taxable estate 1,271,185 921,815
    IHT* 244,578 104,830
    Net estate 1,026,607 816,985
    Lifetime Gift in 2020 - 200,000
    Total benefit 1,026,607 1,016,985

    Assumptions: CPI, property value growth 2%. IHT rate 40%. Investment return 0% as all taken as income. Initial fees £1,313 added to debt. *IHT calculation is after the application of RNRB and NRB, and is based on a 2% CPI growth from 2026 onwards; allowing for the freeze in both NRBs until April 2026.

  3. Benefits for Simon

    At first sight this example does not appear to produce a great benefit. But that ignores the timing of the £200,000 gift. In theory, Sarah could save 18 years of mortgage interest on £200,000 and is likely to secure a lower rate on the new mortgage taken.

    There is also the emotional value of buying a family home to consider. Sarah’s interest savings, would potentially be considerably more than the £9,662 shortfall shown above. This may equate to only a few years of the mortgage interest she would have to pay.

    The lifetime mortgage works in this case because:

    1. Simon is single.
      If he was married or in a civil partnership, IHT would not be an immediate issue because there would be £1,000,000 of NRB and RNRB, all CPI-linked. For couples with children, IHT problems begin further up the wealth scale – once an (index-linked) estate threshold of £2m is reached. At this point, the RNRB taper starts to apply. For childless couples, RNRB generally does not enter the IHT calculations, as it only applies if the property is “closely inherited”.
    2. The RNRB is not lost.
      The RNRB will be CPI-linked from April 2026, so by the time Simon is 86, it will be just short of £231,000 (assuming 2% CPI). The benefit provided by a lifetime mortgage is eroded if it ultimately means that all or part of the RNRB is wasted (it can only be set against a home, subject to the complex downsizing rules).
    3. The NRB is fully useable.
      This is a similar point to 2. The estate net of mortgage debt at death needs to be more than the sum of NRB and RNRB for a lifetime mortgage to have the greatest benefit. It helps that Simon has £200,000 assets in addition to his home.
    4. The lifetime mortgage interest rate is close to the assumed property value growth. 
      The greater the gap between the mortgage rate and property growth, the faster net equity erodes. It is then more likely that the RNRB is not fully useable. Over time, a mortgage rate higher than the property growth rate will reach a point where net equity drops below the RNRB (plus NRB, if appropriate).
    5. Simon outlives the seven-year gifting window.
      The £200,000 lifetime gift will fall back into Simon’s estate unless he survives seven years after making it. Within that timeframe, there is no IHT saving. Simon will have also incurred the expenses of arranging the mortgage. Whether that leaves Sarah worse off depends on her mortgage interest savings.

  4. Points to consider

    It’s important to remember that a lifetime mortgage may not always be the best approach. For example, if Simon were in poor health and unlikely to survive seven years, there would be no financial benefit from the lifetime gift. The lifetime mortgage option is also unlikely to make sense if his property value was lower, and the accumulating mortgage leaves insufficient equity to cover his single RNRB (plus NRB, if appropriate).

    The five points highlight how the various factors can interact, but also how a lifetime mortgage should be considered on an individual basis. For many retirees, their bricks and mortar could be one of their most valuable assets, and equally one that cannot be ignored in financial planning conversations.