Many older homeowners are continuing to use their mortgages to minimise their inheritance tax bill.
Sales of mortgages to over-60s stayed stable last year even though overall sales fell, with a financial planning firm saying many are using home loans to avoid the nation’s least favourite tax.
The value of mortgages borrowed by older homeowners fell less than 1 per cent in the year to September 2023, even though in the same period, overall lending dropped 33 per cent. Over-60s took out £13.2bn worth of mortgages, whereas mortgage sales fell from £331bn to £220bn.
Mortgage sales to older people remained buoyant because mortgaging a property remains a reliable way to reduce inheritance tax, Mark Incledon, CEO of Bowmore Financial Planning, said.
When an inheritance tax bill is calculated, the value of the outstanding mortgage is taken away from the value of the property. This can reduce the inheritance tax bill significantly.
Mr Incledon said: “When you’ve worked for decades to pay off your mortgage, volunteering for another one might seem strange. The reduced inheritance tax bill can be an enormous gift to your children or grandchildren.
“However, older borrowers do face risks retiring with a mortgage, like being unable to make repayments once their income reduces.”
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Mortgage brokers added that carrying mortgage debt into later life was becoming more accepted.
Nick Mendes, of John Charcol brokers, said: “Whether borrowers are deliberately borrowing to limit their inheritance tax is difficult to quantify. Lenders will require any funds raised are for a purpose.
“What I would say is that lending later in life is no longer a taboo subject, historically the notion of carrying debt into retirement wasn’t well received. Attitudes are certainly changing, and carrying debt later in life, and upon death is becoming a norm.
“The later life mortgage market continues to innovate. Many potential purchasers over the age of 50 who don’t speak to a good independent mortgage adviser won’t appreciate all their potential options if they want to move home, including some not available to younger borrowers.”
How can taking out a mortgage limit inheritance tax?
In most cases, borrowers taking out mortgages in later life are doing so on a property they own outright. They then gift the money raised from the mortgage to their children and, as long as they do not pass away within the next seven years, the gift is tax-free.
Then when you do die, the value of the mortgage still outstanding is deducted from the value of the person’s estate, which reduces the amount of inheritance tax liable.
If you’re over 60 and your mortgage has been paid off, it is termed in the financial industry as “unencumbered”, and you can raise funds using the property as collateral.
Some lenders will allow you to have a mortgage up until the age of 85. This means if you are 60, you can get a 25-year term, but if you are older the maximum term may be shortened. You don’t need a deposit, as you own the property outright and the mortgage is more like a traditional loan.
The lender takes a charge over the house or flat if it does give you a mortgage, but will want to know you can afford your repayments. They will look at your pension – they will look at your forecast and if its drawdown they will consider the size of your pot – certain investments, though many lenders do this with caution given they can go up or down, and your savings.
A lender will want to understand purpose of funds being raised but brokers have told i the majority of lenders are happy for homeowners to raise funds to gift.
If a borrower is over 75, the lender will require them to get independent legal advice, but this is to make sure they were of sound of mind to make financial decisions, rather than to discuss inheritance tax.
Those who have less cash sometimes use equity release products which “release” the cash tied up in a home. The downside is that these can often be far more expensive than traditional remortgages.
You may not need to worry about inheritance tax
There’s normally no inheritance tax to pay if either the value of your estate is below a £325,000 threshold or you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.
If you give away your home to your children or grandchildren your threshold can increase to £500,000 as well.
This is why only a small proportion of deaths actually attract any inheritance tax at all.
