TAKING OUT A MORTGAGE IN LATER LIFE TO BYPASS INHERITANCE TAX

With the rising population of individuals aged over 60 in the UK, more are exploring the option of obtaining mortgages to mitigate Inheritance Tax (IHT) burdens. This financial strategy aims to potentially lessen the IHT obligations when passing down assets or properties to family members upon death, if deemed appropriate.

IHT is a tax imposed on the overall value of an individual's estate following their demise, encompassing all assets such as property, possessions, and cash. Presently, the standard IHT rate stands at 40%, applicable solely to the portion of the estate surpassing the tax-free nil-rate band threshold of £325,000.

There are circumstances under which an estate can be exempt from this tax:

• If the estate's total worth falls below the £325,000 threshold or nil-rate band.
• If everything exceeding the threshold is bequeathed to a spouse or registered civil partner.
• If everything exceeding the threshold is bequeathed to an exempt beneficiary, like a charity or a community amateur sports club.

An increase in the tax-free threshold occurs when gifting your home to children or grandchildren, raising it to £500,000. For instance, if an estate is valued at £525,000 and the IHT threshold is £325,000, the taxable portion would amount to £200,000 (£525,000 - £325,000), resulting in a tax liability of £80,000 (40% of £200,000).

The transfer of a home to a spouse or registered civil partner upon death doesn't trigger IHT. However, if the property is passed on to another individual, it contributes to the estate's total value. An exception to this is the Residence Nil-Rate Band (RNRB), which boosts the tax-free threshold when leaving the home to children or grandchildren.

Obtaining a mortgage has the potential to diminish the amount of Inheritance Tax (IHT) by decreasing the size of an estate. This strategy proves advantageous for individuals possessing property exceeding the threshold amount, yet wish to spare their family from the associated IHT expenses. For instance, a parent owning a house valued at £400,000 could secure a mortgage of £150,000 and designate the property to their child in their Will. As a result, the estate's size would shrink from £400,000 to £250,000, well below the threshold figure. Consequently, no IHT would be levied on this asset when transferred to the next generation.

In certain scenarios, individuals aged over 60 who opt for mortgages can secure more favorable interest rates compared to what they would have obtained earlier in life if they had pursued loans or mortgages. This results in the reduction of potential Inheritance Tax (IHT) liabilities, diversification of their investment portfolio, and a more efficient utilization of their financial resources.

Consequently, obtaining a mortgage later in life can be advantageous for those seeking to minimize their IHT obligations and maximize their financial assets. Nonetheless, it is imperative for individuals to thoroughly assess all implications before committing to such agreements, as borrowing entails inherent risks regardless of age. Seeking professional mortgage advice is indispensable in navigating this decision.