Later life finances and Inheritance Tax

It’s not always clear what ‘later life lending’ really means. Equity release is probably the first thing that comes to mind. As a result, people don’t always look at their whole financial position. 

 

Your pension pot, other income, savings, and investments are all important. While it might seem a long way ahead, you should also consider what you want to leave to loved ones. With better information more people could make their choices with the future in mind. One suggestion is that lenders should have a duty to provide information about fairness, transparency and suitability. 

 

Current Financial Conduct Authority (FCA) rules already say advisers should consider alternatives to equity release. They should assess a wide range of income sources for affordability and use clearer language. 

 

Options such as lifetime mortgages allow you to access money tied up in your home. It’s a type of loan that’s secured against your property which you can spend as you wish. It’s repaid when you die, or the last borrower moves into long-term care. 

 

The question is how this could affect the beneficiaries of your Will and your inheritance tax (IHT) liability. 

 

Your property is probably your most valuable asset and often represents the largest part of your estate. Your beneficiaries may have to pay 40% IHT on your assets above £325,000 when you die. If you plan to leave your home to descendants, you have an additional £175,000 allowance before IHT. As a couple you could leave £1,000,000. Borrowing money against your home reduces the value of your assets because it’s repaid out of your estate before IHT. However, taking financial advice is very important. 

 

Lifetime mortgage. You can secure your loan against your home. You can continue to live there and use the tax-free amount as you wish. When the last borrower dies or goes into long-term care the repayment includes the amount borrowed and interest. Your home might sell for less than the total amount owed. If your home is worth more, your loved ones can benefit. They must pay IHT, depending on the total value of your assets. 

 

Interest only. You can borrow a lump sum and pay off just the interest on the loan each month. When your home sells or you move into long-term care, the repayment is the same as the amount you borrowed. 

 

Home reversion. You can sell all or part of your home to a lender and continue to live there. However, the amount you receive is often below market value. When the last borrower dies or moves into long-term care, the lender receives their share of the property’s value. Your loved ones can share what’s left and pay inheritance tax if necessary. 

 

Most lenders require repayment within 12 months for these examples and continue to add any interest until full settlement. Your beneficiaries can sell or remortgage your property or pay the balance from other sources. 

 

Downsizing. You can sell your family home and buy a smaller property and use the remaining money for your retirement or loved ones. This might allow you to live mortgage-free to reduce your expenses. However, you will pay Stamp Duty on your new purchase if it’s over £125,000 and may also pay Capital Gains Tax (CGT). 

 

Other assets. You might consider using your savings, drawing more from your pension or other assets to add to your retirement income.