Why Some Over-60s Take Out a Mortgage on a Property They Own Outright
For many homeowners over 60, the idea of taking out a mortgage on a property they already own may seem unnecessary. However, in certain circumstances, doing so can be a deliberate and effective estate-planning strategy, particularly when the goal is to mitigate potential Inheritance Tax (IHT) liabilities.
Understanding Inheritance Tax
Inheritance Tax is charged on the total value of an individual’s estate upon death, encompassing property, possessions, investments and savings.
The standard Nil Rate Band (NRB), the portion of an estate that is exempt from IHT, currently stands at £325,000 per individual. The rate of tax applied to the value above this threshold is 40%.
In addition, where a main residence is left to direct descendants (children, stepchildren, adopted or foster children, or grandchildren), an extra allowance known as the Residence Nil Rate Band (RNRB) may apply. This currently provides an additional £175,000 tax-free allowance.
Together, these allowances mean that an individual can pass on up to £500,000 without incurring IHT, or up to £1 million for a married couple or civil partners, if both allowances are fully utilised. Both thresholds are frozen until at least April 2026.
When IHT May Not Apply
Your estate may be fully or partially exempt from IHT if:
- Its total value is below the £325,000 threshold.
- Everything above that threshold is left to a spouse or civil partner.
- Assets are left to an exempt beneficiary, such as a charity.
If your home is left to direct descendants, the RNRB can increase the total tax-free allowance to £500,000.
For example, if an estate is valued at £525,000, and the tax-free threshold is £325,000, the taxable portion is £200,000. At the current IHT rate of 40%, this would generate an IHT bill of £80,000.
How a Mortgage Can Reduce IHT Exposure
When a property is transferred to a spouse or civil partner upon death, no IHT is payable. However, if the property is left to anyone else, its full value contributes to the taxable estate.
By taking out a mortgage against the property, the net value of the estate can be reduced, as the outstanding mortgage balance effectively offsets part of the property’s worth. This may help lower or even eliminate the overall IHT liability.
Example:
If an individual owns a home valued at £400,000 and secures a £150,000 mortgage, the estate’s taxable value is effectively reduced to £250,000. As this sits below the IHT threshold, the estate may no longer be liable for IHT.
Important Considerations
While this approach can be a legitimate way to reduce IHT exposure, it is not suitable for everyone. There are several key factors to evaluate:
- Affordability and sustainability: Borrowing later in life must be financially manageable, with clear plans for repayments.
- Interest rate implications: Even at competitive rates, the long-term cost of borrowing must be considered against the potential IHT savings.
- Impact on beneficiaries: The structure of the loan and how it is repaid should align with broader estate-planning objectives.
- Eligibility and lender criteria: Some later-life mortgages, such as lifetime or retirement interest-only products, may have specific requirements.
- Tapering of allowances: Estates exceeding £2 million may see their RNRB gradually reduced, limiting the overall tax-free benefit.
The Value of Professional Advice
Taking out a mortgage in later life to manage IHT requires careful consideration and expert guidance. It is vital to seek professional financial and tax advice before making any decision.
A qualified adviser can help assess whether this strategy suits your personal circumstances, explain potential risks, and ensure that it integrates effectively with your wider estate and succession plans.
Next Steps
If you would like to understand whether this approach could help reduce your estate’s future IHT liability, our advisers are available to guide you through your options.
We can provide clear, tailored advice designed to preserve your wealth, protect your assets and ensure that your loved ones benefit in the most efficient way possible.
Please note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. Please also note: Later Life mortgage options include Retirement Interest Only and Lifetime mortgages. To understand the features and risks, always obtain a personalised illustration.
