Reducing IHT, Preserving Your Estate, and Supporting Intergenerational Wealth
Property is often the most valuable asset in an estate. Yet without careful planning, much of the wealth tied up in the home can be lost to Inheritance Tax (IHT). With thresholds frozen and pension tax reforms arriving in April 2027, more families than ever are finding themselves unexpectedly drawn into the IHT net.
This guide explores how later life mortgages and lifetime gifting can be used strategically to reduce IHT exposure, preserve wealth for future generations, and provide support where it matters most.
Property, Pensions, and Inheritance Tax Exposure
According to the Office for Budget Responsibility, nearly 1 in 10 deaths will trigger an IHT liability by 2030. While property remains the primary contributor to taxable estates, changes to pension rules from April 2027 are set to bring a new wave of complexity.
Upcoming Pension Taxation Changes (April 2027)
- Most unused pension funds and death-in-service benefits will count towards your taxable estate.
- Combined IHT and income tax charges could create effective tax rates of up to 87% in extreme cases, depending on how benefits are drawn and taxed
- Personal Representatives (not pension scheme administrators) will be responsible for reporting pension assets for IHT.
In light of these changes, clients are increasingly looking to rebalance their estate by using property wealth more actively, either through strategic gifting or wealth release.
Understanding the Residence Nil-Rate Band (RNRB)
The RNRB provides an additional IHT allowance where a main residence is passed to direct descendants. However, the rules are not automatic and can easily be misunderstood.
| Criteria | Requirement |
|---|---|
| Property Ownership | Must be in relation to a main residential home |
| Beneficiaries | Property must pass to direct descendants (children, grandchildren, stepchildren) |
| Estate Value Threshold | Below £2 million (tapered above this, lost entirely at £2.35 million) |
| Maximum Relief | £175,000 per person (£350,000 per couple) on top of the standard NRB |
| Transferable Allowance | Unused RNRB and NRB can be transferred between spouses or civil partners |
| Downsizing / Sale of Home | RNRB preserved if proceeds pass to descendants, provided detailed documentation |
| Gifting for other family needs | 13% |
Practical Examples
- Widower, 2025: Leaves £900,000 home to two children. Full NRB and RNRB used via spouse’s estate = No IHT due, assuming full allowances are available
- Couple with £3m estate: Leave home to children, but RNRB is tapered due to estate size = IHT liability remains
Using Later Life Mortgages to Reduce Inheritance Tax
Later life mortgages can offer a route to reduce IHT liability by enabling strategic gifting or redistributing wealth while retaining ownership and residence.
Lifetime Mortgages
- Available from age 55+
- Release tax-free cash from your property without monthly repayments
- Gifts release funds to reduce your taxable estate
- Gifts are IHT-exempt if you survive seven years from the date of the gift
Gifting Example
A homeowner gifts £200,000 released from a lifetime mortgage to their children. If they survive seven years, the gift is exempt from IHT. Potential tax saving: £80,000 (at 40%).
Retirement Interest-Only (RIO) Mortgages
- Borrow a fixed sum and pay only the interest monthly
- Capital is repaid upon death or move into long-term care
- Provides predictable loan amounts, simplifying IHT forecasting
- Enables early gifting without needing to downsize
Combining Downsizing with Gifting Strategies
A blended approach may suit some homeowners:
- Sell a larger property to release capital
- Use a later life mortgage on a smaller replacement home to free further funds
- Gift during your lifetime or restructure assets for long-term tax efficiency
- Retain flexibility and control, with reduced lifestyle outgoings
Gifting and Inheritance Tax Rules: Quick Reference
| Gift Type | IHT Treatment |
|---|---|
| Annual exemption (£3,000) | IHT-exempt |
| Small gifts (£250/person) | IHT-exempt |
| Estate Value Threshold | Below £2 million (tapered above this, lost entirely at £2.35 million) |
| Wedding gifts | Exempt within limits (£5,000 for children, £2,500 for grandchildren) |
| Regular gifts from income | Potentially exempt if habitual and from surplus income |
| Larger one-off gifts | Exempt after 7 years (subject to taper relief) |
| Gifting for other family needs | 13% |
Using Gift Inter Vivos Insurance
For high-value gifts, consider a Gift Inter Vivos insurance policy to cover the potential IHT liability if the donor passes away within seven years. This can offer peace of mind and preserve the full value of the intended gift.
The Importance of Professional Advice
Inheritance tax planning is multi-faceted. It requires coordinated input from your mortgage adviser, wealth planner, solicitor, and accountant. Working together, we can ensure your plans are legally sound, financially robust, and tailored to the needs of your family.
At Henry Dannell, we collaborate with a trusted network of professionals to offer guidance on:
- Later life lending strategies
- Gifting and estate planning
- Pension implications from 2027 reforms
- Legal and regulatory compliance
Summary
Later life mortgages offer a strategic and controlled route to reduce Inheritance Tax, preserve intergenerational wealth, and support loved ones during your lifetime. In the face of upcoming legislative changes and shifting thresholds, early action remains the most effective form of legacy planning.
Speak to a specialist at Henry Dannell to explore how tailored mortgage advice can form part of your broader inheritance and estate strategy.
Henry Dannell does not provide tax advice. Clients should always consult a qualified tax adviser for guidance on any tax-related matters.