IHT planning in the light of IHTA84s162(b) Lifetime mortgage and Home reversions

With smaller estates the principal asset will be the marital home.  Property has proven to be the best investment a young couple can make in the past.  Its not hard to see why.  Property rents are substantial and if a couple settle down to have children it is likely they are going to remain put for some 20 years.  Lets say our couple rent a semi detached house the rent will escalate over time for inflation. Purchasing the house on the assumptions made below the loan falls to zero while the house will escalate in value and be a substantial unencumbered asset in the future.  See virtue has its rewards!


London of course operates in its own 'bubble' as good quality London property is now effectively an international reserve asset with no shortage of foreign buyers and substantial rents.  A two bed flat somewhere fashionable could set you back £500 a week in rent. £26,000 per annum at compound inflation of say 3% over 20 years.  As you can see the effect is magnified.

Now the kids leave home.  Often, the best decision for people is to trade down - sell a property which is too big once the children have left, buy a smaller one and release a cash sum perhaps to set the kids up in their home or invest. In other circumstances, the individuals may for personal reasons wish to stay in the family home and equity release is then the most suitable choice.


Obviously if we are talking a buy to let you must take into account the rent net of interest will be subject to tax at your marginal income tax rate.

One option is the lifetime mortgage repaid on death the other the home reversion where the couple sell their home but occupy it until their deaths.  Read on for tax planning fun below.

While reflecting on IHTA84 s162b lets not lose sight of the fact what a good investment (and pension fund) the family home is.
— Morning chorus (@ianbrealey) December 9, 2013

And so to tax planning for deductible liabilities for the purpose of Inheritance Tax.  

Case study.  Here I am with my substantial estate at the age of 80 perhaps predeceased by my spouse.  Not only do I have the gloomy prospect of no longer following Chelsea Football Club but the tax man is hovering over my estate ready to reap a 40% tax reward when I pass on.  In the past I would simply have rung a savvy stockbroker, mortgaged the family home and invested in a sensible portfolio of AIM listed trading companies which after two years would have qualified for business property relief. 

AIM listed shares like farmland qualify as unquoted shares for 100% IHT relief.  Problem solved.  Now as a result of the operation of IHTA84 s162b from 6.4.13 new loans must be set against the favoured asset the AIM portfolio rather than the House. There are other anti tax planning provisions s162A and s175A to consider.

All of which tells us that we should consider tax planning at an earlier stage to take advantage of spouse exemptions and the Potentially Exempt Transfer rules.  This naturally means more consideration of the Lifetime Mortgage and the Home Reversion Plan.