Unlocking Later Life Financial Freedom: The Power of Gifting

The power of gifting

Inheritance Tax (IHT) receipts in the UK hit a record high of £7.5 billion in the 2023/24 tax year, up £0.4 billion on the previous year. They are set to continue rising sharply in coming the years.

A recent report from the Institute for Fiscal Studies (IFS) predicts that by 2032/33, 1 in 8 people will have IHT due either in the event of their death, or their spouse/civil partner’s death. Naturally, many homeowners are now actively looking at solutions to mitigate their Inheritance Tax liability.  That’s where a Lifetime Mortgage may come in useful.

The Later Life Lending mortgage sector is growing, with new hybrid products joining the suite of existing options. At LDN Finance, our award-winning experts can provide tailored advice from across the market. Award-winning later life lending director Darren Johncock explains more below.

How a Lifetime Mortgage can help to release capital and support a gifting strategy

Without adequate planning, any property that exceeds the IHT nil-rate band (£325,000) and residence nil-rate band (£175,000 if you plan to leave your home to a direct descendant) could be liable for tax at a rate of 40%.

Gifting to family members is a common strategy for mitigating IHT. Not only do your family get to benefit from the gift immediately but, providing you survive for seven years after making the initial gift, this will fall outside the value of your estate and outside of your IHT liability. These are known as ‘potentially exempt transfers’.

So how can you utilise a Lifetime mortgage to release wealth that is tied up in your property? Previously, moving and downsizing was once thought to be the only way to release capital locked up in your home. However, a lifetime mortgage allows you to borrow against your home and release capital that you can then gift to your beneficiaries, whilst remaining in your property. Often, you won’t have to make any monthly repayments as the interest is rolled up until you pass away, sell the property, or move into long-term care. As the interest rolls up, this creates a debt against your estate therefore reducing the value of your estate.

By choosing a lifetime mortgage, clients can potentially save thousands of pounds by not having to fork out on moving costs (such as Stamp Duty Land Tax), solicitor fees and estate agents’ fees.

How a Lifetime mortgage helped our clients mitigate IHT issues

Here’s a simple example of how you and your family could use lending to reduce an IHT bill.

Two clients are married and aged 81 & 77 respectively. The clients own an unencumbered property in London worth £1.2 million and in addition to other assets, they also have a rental property worth around £900,000. The couple have two children and several grandchildren who will be the sole beneficiaries of their estate. In the event of their death, the clients estate could be faced with a large IHT bill of around £450,000, based on an estate value of £2.2 million.

Our award-winning Later Life lending team were able to assist and provided the clients with the following solution. We arranged a lifetime mortgage of £500,000 against the clients’ main residence, enabling them to make gifts totalling £350,000 to their children and grandchildren, whilst still retaining equity in the property.

Gifting not only allows homeowners to mitigate their IHT liability, but the gifted funds also allow their loved ones to realise their own aspirations. In this scenario, one child purchased a new, larger property and the other has repaid their mortgage in full.

The remaining debt will reduce the value of their estate, therefore reducing or even eliminating, the IHT bill. They will also still be able to raise additional funds in the future, should they need it.

Interested to learn more about gifting and lifetime mortgages? Get in touch with our experienced advisers today. Contact us here.