Planning for inheritance tax (IHT) when you have a lifetime mortgage requires careful consideration of your financial situation, estate planning goals, and the specifics of the lifetime mortgage itself. A lifetime mortgage, often a form of equity release, allows you to borrow against the value of your home while retaining ownership. Here’s a guide to help you plan effectively:
1. Understand Your Lifetime Mortgage
Impact on Estate Value:
- Loan Repayment: With a lifetime mortgage, the loan is typically repaid from the estate when you pass away. The accumulated interest over time can significantly reduce the value of your estate.
- Interest Rates: Understand whether your lifetime mortgage has a fixed or variable interest rate and how this will affect the amount owed upon your death.
2. Estimate Your Estate Value
Assess Your Assets:
- Home Value: Get a professional valuation of your home to determine its current market value.
- Outstanding Mortgage: Determine the total amount owed on the lifetime mortgage, including accrued interest.
Calculate Net Estate:
- Estate Value: Subtract the outstanding mortgage from the home’s value and add other assets, such as savings, investments, and personal belongings, to calculate your net estate value.
3. Review Inheritance Tax Thresholds
Understand IHT Exemptions:
- Nil-Rate Band: The standard IHT threshold in the UK is £325,000 per individual (as of 2024), above which 40% tax is applied. There are exemptions and reliefs, such as the residence nil-rate band (RNRB) for passing on a family home.
- RNRB: The RNRB increases the threshold if you pass your home to direct descendants. This can be up to an additional £175,000 per individual (as of 2024), subject to eligibility.
4. Evaluate Your Options for Managing IHT
Consider Lifetime Gifts:
- Gifts: Making gifts during your lifetime can reduce the value of your estate. Gifts may be exempt from IHT if they fall under annual exemptions or if you live for seven years after making them.
- Gift Allowances: Utilize annual gift allowances and other exemptions to reduce the size of your estate.
Utilize Trusts:
- Trusts: Placing assets into a trust can help manage IHT liabilities. Various types of trusts, such as discretionary or life interest trusts, can be used to pass assets on while potentially reducing IHT.
- Seek Advice: Consult a solicitor or estate planning advisor to set up trusts appropriately and ensure they align with your financial goals.
5. Plan for the Repayment of the Lifetime Mortgage
Insurance:
- Life Insurance: Consider a life insurance policy specifically designed to cover the lifetime mortgage balance. This can provide a lump sum to repay the mortgage upon your death, preserving more of your estate for inheritance.
- Policy Types: Ensure the insurance policy is sufficient to cover the mortgage amount and consider options for inflation protection.
Estate Planning:
- Will: Ensure your will is up-to-date and reflects your wishes regarding the distribution of your estate. Specify how the lifetime mortgage should be handled.
- Beneficiaries: Clearly define beneficiaries and consider how the mortgage and any insurance policies will affect them.
6. Regular Review and Adjustment
Monitor Changes:
- Market Conditions: Regularly review the value of your home, the balance of the lifetime mortgage, and the potential impact of interest rate changes.
- IHT Regulations: Stay informed about changes in IHT laws and thresholds that may affect your planning.
7. Seek Professional Advice
Financial and Legal Experts:
- Financial Advisor: Consult with a financial advisor who specializes in retirement and estate planning to get tailored advice on managing a lifetime mortgage and inheritance tax.
- Solicitor: Work with a solicitor experienced in estate planning to create or update your will, set up trusts, and handle legal aspects of inheritance.
By proactively addressing these aspects, you can better manage the impact of a lifetime mortgage on your inheritance tax liability and ensure that your estate is handled according to your wishes.