Using housing wealth in later life: what advisers should know about inheritance tax (IHT) interactions

For many clients, the family home represents a significant share of their wealth in later life. However, unlike other assets, it is less liquid and has not always been central to financial planning conversations.

At the same time, inheritance tax (IHT) is becoming relevant to a broader range of clients. Frozen thresholds, rising property values and a more complex relief landscape means more estates may be brought into scope over time.

Against this backdrop, advisers are increasingly taking a broader view of a client’s finances, including housing wealth, when considering estate structures, liquidity and the timing of intergenerational transfers.

Considering property wealth within estate planning

There are a number of ways property wealth may be considered as part of estate planning. Each approach comes with different implications.

Gifting with continued use

If a client gives their home away but continues to live in it, this is typically treated as a “gift with reservation of benefit”. In most cases, the property will still form part of the estate for IHT. To mitigate this, the client would generally need to pay a full market rent, contribute to household costs and survive seven years from the point the arrangement begins.

Downsizing

For some clients, downsizing can be a practical way to release value from their main residence. Moving to a lower‑value property can free up capital to support gifting or meet later‑life needs, although costs such as stamp duty, legal fees and moving expenses should be considered, alongside the personal impact of leaving a long‑term home.

Accessing property wealth without selling

Products such as Lifetime Mortgages can provide a way to access housing wealth (and reduce the final estate value) without selling the home. Understanding how these products work, and how they may affect estate value over time, can support a more complete view of a client’s position.

What is a Lifetime Mortgage?

A Lifetime Mortgage is a loan secured against a client’s home, typically available to homeowners aged 55 or over.

Unlike a conventional mortgage, there are usually no required monthly repayments. Instead, interest is added to the loan over time, increasing the total amount owed.

The loan and any accrued interest are usually repaid when the property is sold, typically following death or a move into long-term care.

Most products allow voluntary repayments, although this will vary by provider and product design.

How a Lifetime Mortgage can affect the value of an estate

A Lifetime Mortgage is secured against the property. Over time, the balance can increase as interest is added, which reduces the net value of the estate.

This reduction may, in some cases, affect the proportion of the estate that is exposed to IHT. The impact will depend on factors such as the size of the loan, the interest applied and how long it is in place.

For this reason, Lifetime Mortgages may form part of wider estate planning discussions. They can also support conversations about accessing housing wealth to meet financial needs in later life, including the possibility of earlier gifting or intergenerational support.

Any impact on IHT is a consequence of how borrowing and accrued interest affect the estate over time, rather than a feature designed specifically for tax planning.

IHT fundamentals relevant to later life lending

Inheritance tax is typically assessed on the value of an individual’s estate on death, including property, investments and other assets, less any allowable liabilities.

Two key components often shape the position:

• The Nil Rate Band (NRB), which applies to the value of the estate more broadly.
• The Residence Nil Rate Band (RNRB), which may apply when a main residence is left to children or grandchildren.
  • The RNRB is subject to tapering for large estates: Reduced by £1 for every £2 over £2 million estate value.

• A single person could potentially pass on up to £500k tax-free.
• A couple could potentially pass on up to £1m tax-free (if both bands fully apply and are transferable)

The availability and interaction of these thresholds depend on individual circumstances.

Residence Nil Rate Band considerations

The Residence Nil Rate Band (RNRB) adds a layer of complexity when considering Lifetime Mortgages within estate planning.

Reducing the overall estate value (for example, through a Lifetime Mortgage) could bring the estate below the £2 million taper threshold, which may help reinstate access to the RNRB. However, a Lifetime Mortgage could also reduce the amount of RNRB available if the outstanding loan lowers the net value of the property below the maximum allowance. For example, a couple who own a property valued at £500K with a Lifetime Mortgage of £250K would limit the RNRB to £250K (net value of the property).

Gifting and Lifetime Mortgages – where the interactions arise

In some cases, funds released through a Lifetime Mortgage may be used for intergenerational transfers, including gifting.

Where gifts are made, standard IHT rules apply. In particular:

• They may be treated as potentially exempt transfers (PETs).
• Full exemption typically depends on the donor surviving seven years from the date of the gift.
• The timing, size and sequencing of gifts can materially affect the eventual IHT position.

The importance of time, longevity and interest

Outcomes in this area are highly sensitive to time-based factors, including:

• How long the client lives after taking out the Lifetime Mortgage.
• How long they survive after making any gifts.
• The repayment choices and extent of interest roll-up over time.

These factors interact in different ways. For example, a longer time horizon may increase the total interest accrued, while also extending the survival period for gifting purposes.

As a result, advisers should expect a range of potential outcomes, rather than a single projected position.

Key risks and wider considerations

Beyond tax interactions, there are a number of important considerations associated with Lifetime Mortgages:

• Interest roll-up and compounding, which can significantly increase the loan balance over time.
• The impact on beneficiaries, particularly where estate value is reduced.
• Potential implications for means-tested benefits.
• Product-specific features such as repayment options and early repayment charges.
• The potential need for long-term care, where releasing equity today may reduce the funds available to meet future care costs and could trigger repayment on entry into care. 

Equity release is not suitable for all clients, and outcomes will depend on individual circumstances, objectives and risk tolerance.

Summary: what advisers should take away

Housing wealth can play an important role in later-life planning.

Lifetime Mortgages may form part of that discussion and can interact with inheritance tax through their impact on the net value of an estate. However, outcomes are not guaranteed: timing matters as much as amounts and individual circumstances are key factors.