Written by Dave Harris, CEO at later life lender, more2life
Inheritance Tax (IHT) is complicated. It’s not necessarily the tax itself, but rather the regime around it, from annual gifting allowances to nil rate bands. And while many people – perhaps even most, given the tax’s unpopularity – want to keep their eventual liability as low as possible, understanding how to do so properly is another matter entirely.
One aspect of financial planning that we are seeing, particularly with high-net-worth clients, is the role of lifetime mortgages. So how are advisers utilising lifetime mortgages to help mitigate the eventual IHT bill, and would it work for your clients?
Why £2m is the magic number
When working with high-net-worth clients, £2 million is an important figure to keep in mind. That’s the point at which the Residential Nil Rate Band – the tax-free allowance for passing on the main residence to loved ones after death – starts to be stripped away.
The allowance currently stands at £175,000 per individual, but is reduced by £1 for every £2 above £2 million that the estate is valued. Keeping the estate below £2 million is therefore incredibly tax-effective, as the client ensures they keep the entirety of the Residential Nil Rate Band. And that’s where lifetime mortgages become an attractive option for advisers and their clients.
The role of the lifetime mortgage
Anyone looking to limit their IHT liability will want to look at ways to reduce the overall size of their estate. And given rising house prices over recent decades, housing wealth is likely to represent a sizeable portion of the estate. Lifetime mortgages come into their own here.
Borrowing against the property helps to reduce its value in terms of the estate, cutting the overall liability. If it keeps the value of the estate below £2m – or at least below levels at which there is still some of the Residential Nil Rate Band left – then the loan is even more effective.
Making a gift
But there’s an added benefit in terms of gifting. The high-net-worth clients who want to keep their IHT bill low often don’t need the money from the loan themselves. They do, however, have loved ones who would benefit – perhaps it could be used as a deposit on a property of their own, to start their own business, or to cover ever-escalating school fees.
The funds unlocked through a lifetime mortgage can be utilised to make the most of the annual gifting allowances everyone enjoys. So long as the client lives for seven years after making the gift, the money given away is not considered part of their estate.
There’s the further upside of then being able to see those loved ones putting what is effectively an early inheritance to use, while the client is still alive.
A question of trust
In some cases, the client won’t be ready to gift all of the money away. In these instances, we have seen advisers use trusts for the funds unlocked through the lifetime mortgage, with the capital to be passed on at a later date.
This structure can allow the client to continue generating income from the assets during their lifetime, but with the trust itself being excluded from the estate when they eventually pass away.
Building tax partnerships
While advisers are perfectly placed to highlight the potential estate benefits a lifetime mortgage can deliver, clients should also be directed towards tax advisers. As we have seen with the political arena of late, there is no replacement for specialist, individual advice, particularly when circumstances are more complex or high value.
This should be seen as an opportunity for advisers though; a chance to forge new referral relationships which not only mean current clients receive the most comprehensive guidance, but could open up a pathway for gaining new clients.
Playing a part in broader financial planning
A good financial plan covers a broad range of areas. There will always be an element of education involved, pinpointing options which otherwise might seem counterintuitive – a new mortgage might not seem an obvious option for a wealthy client, who doesn’t really need the money themselves.
This is where advisers can really prove their worth, understanding all of the available options and guiding the client through what can be a complex decision-making process.
But what’s clear is that lifetime mortgages can be an effective tool for clients who are most focused on their legacy, and passing on as much of their estate as possible to their loved ones. Now is the time to ensure specialist later life lending has a place in your toolkit.
Dave Harris is CEO at later life lender, more2life
