Homeowners in their 50s, 60s and beyond who are looking for ways to reduce their estate’s liability to inheritance tax (IHT) may be tempted to turn to their property to help them do this.

If you own your home outright, or it’s risen in value over the years, and you’ve built up a lot of equity in it, you might be considering unlocking some of your property wealth via equity release or by remortgaging so you can give it to your children as a ‘living inheritance’.

Here, we explain how you can release equity via taking out a mortgage or equity release plan to reduce your IHT bill, along with some of the pros and cons of doing so.

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Are you affected by inheritance tax?

Plenty of people don’t have to worry about inheritance tax, as it is only payable (at a rate of 40%) on the value of any assets you have which are over the current inheritance tax threshold, currently is £325,000 (£650,000 for married couples or civil partners).

When you die, any assets over and above this amount may be subject to tax of 40%. If you leave all assets above this threshold to your spouse, civil partner, or a charity, this money won’t be subject to inheritance tax. You also have an additional residence nil-rate band in addition which is £175,000 if you leave your home to your children or grandchildren.

Read more in our guides What is inheritance tax? and Understanding inheritance tax.

However, soaring property prices in recent years and a frozen IHT threshold since 2009 have seen growing numbers of people’s estates become liable for IHT when they die.

The good news is that if you are concerned about leaving your loved ones with a hefty inheritance tax bill, there may be ways you could reduce your estate’s liability to this tax, including handing over a ‘living inheritance’. This is often a lump sum – perhaps savings, investments or equity released from your property – given to children while you’re still alive. Gifting some of the value of your home could potentially provide your children with money to put towards buying their first property, for example, while also potentially reducing the amount they have to pay in IHT in the future.

Provided you don’t pass away within the next seven years, the gift is considered to be free from IHT. Read more in our article Which gifts are exempt from inheritance tax? and Can I take money out of my property to give to my children?

When you pass away, the value of your outstanding mortgage (and any other outstanding debts) is deducted from the value of your estate, further reducing the amount of IHT your loved ones will have to hand over to HMRC.

Bear in mind, however, that rising interest rates in recent years mean that equity release and other mortgage rates have become much more expensive than they used to be. Equity release costs in particular can be high because you’re not repaying any of the interest on the money you’ve borrowed, so interest rolls up and is compounded. This means that you’re essentially charged interest both on the original sum unlocked and also on any interest already charged. It’s therefore essential to seek professional financial advice first if you’re considering taking this route.

Can you get a mortgage when you’re over 50?

A growing number of lenders are willing to lend to borrowers in their 50s, 60s, and beyond. Besides standard residential mortgages, there are also innovative products on the market such as retirement interest-only mortgages that may release money that could potentially have play a role in inheritance tax planning.

If you’re in your 50s or 60s, you should still be able to get a mortgage, sometimes even with a 25-year term, as a growing number of lenders have pushed back the maximum age they will consider at the end of the term, with Nationwide, for example, letting you have a mortgage until the age of 85. However, if you’re in your mid 60s, for example, you may need to be prepared to shorten the term of the mortgage to be accepted for a deal. If there’s an age limit of 75, for example, you’d only be able to get a maximum term of 10 years if you take out a mortgage at age 65. Read more in our articles Mortgages for over 50s: what you need to know, and Mortgages for over 60s: what you need to know.

When it comes to how much you can borrow, you’ll be subject to the same affordability checks as anyone else, although these may include your pension income if your mortgage term runs into retirement. You’ll usually be able to borrow up to around four and a half times your income if you’re over 50. If a borrower is over 75 the lender may require them to seek independent legal advice to ensure they understand the implications of taking out a mortgage.

Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.

If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,000 reviews.

If you’re taking out a mortgage on a property you own outright, you will need to let the lender know what you plan to do with the funds, although lenders will usually allow you to use the money as a lifetime gift, for example, to provide your child with a property deposit.

Retirement interest-only mortgages

Retirement interest-only mortgages aimed at borrowers in their 50s and 60s can also be a way to release some equity to provide a living inheritance. They are also a way to remortgage if you’re having difficulty securing a deal because you’re aged 50 or over.

These involve taking out a loan against the value of your property and repaying the interest each month, rather than the interest and some of the capital you owe. Read more in our article How retirement interest-only mortgages work.

This type of mortgage is significantly different to a standard interest-only mortgage with a specific end date by which you must repay your debt. By taking out a retirement interest-only mortgage, you can continue to make interest payments into retirement, with the loan only paid back when you die or move home. If you take out a joint RIO mortgage, this applies to both borrowers, so you don’t need to sell if your partner moves into care or passes away.

Using equity release to provide a living inheritance

Alternatively, you may choose to take out an equity release plan to access cash tied up in the value of your home. However, these can be more expensive than traditional residential mortgages, with higher rates. Interest on equity release plans rolls up, or compounds, over the years and is only repaid on death, or when you move into long term care. This could roll up into a substantial sum that wipes out any savings on inheritance tax made by gifting this money. However, equity release plans have become increasingly flexible in recent years, and many allow you to make partial repayments. Find out more in our guide Equity release – what is it and how does it work? and How much does equity release cost?

Bear in mind that if you receive means-tested benefits, receiving a tax-free lump sum, even if this is passed onto your children, affects your entitlement to these benefits. Read more about the advantages and disadvantages of equity release in our article Is equity release right for me? and Equity release – what are the risks?

Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.

If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,000 reviews.

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