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Housing wealth is the second largest asset for over 55s1. In fact, older homeowners hold more than £2.6 trillion in equity2. However, greater financial capital ultimately means more tax. With this in mind, your clients who hold larger estates could be considering their inheritance Tax (IHT) liability upon death.
Clients in this position could consider gifting to family in their lifetime. The difficulty is that many do not have the capital to make lifetime gifts. As a result, HMRC expects to collect £5.3bn of IHT in 2019/20 – more than double the IHT paid ten years ago3. To reduce the IHT bill for many households, the Government introduced the residence nil rate band (RNRB) in 2017. This was designed to pass a home to immediate family without a tax charge. Despite its introduction, the RNRB did little more than counter the freezing of the nil rate band (NRB) since 20094.
According to HMRC, UK residential property accounts for more than half of gross estate assets. Yet IHT planning with the family home has traditionally been difficult. This is in part due to issues around gifts with reservation (GWR) and pre-owned assets tax (POAT). But today’s low interest rates now offer an alternative way to use residential property in estate planning.
A lifetime mortgage is a loan secured against the home. As a form of equity release, it allows your clients to unlock some of the wealth tied up in their home. It is usually repaid upon death or when your client moves into long term care. While there may be cheaper ways to borrow, interest rates on many lifetime mortgages are now below 3%. At that level – and being fixed for life – the lifetime mortgage could be a viable option to provide capital for lifetime gifting.
A lifetime mortgage won’t be right for everyone. But in the right circumstances, they could offer a useful way to provide an early inheritance to loved ones.
Your client should be made aware that if they gift money away, there may be inheritance tax to pay in the future. Interest is charged on the loan amount plus any unpaid interest added.
We specialise in helping advisers understand the opportunities in the lifetime mortgage market.
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1ONS: Total Wealth in Great Britain – April 2016 to March 2018
2Equity Release Council, 2019
3Office for Budget Responsibility: Inheritance Tax
4GOV UK: Inheritance Tax thresholds and interest rates
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