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How To Avoid Inheritance Tax With A Mortgage

Updated on April 9, 2012

So, you would like to plan efficiently to avoid inheritance tax?  How do you do this?  Well, there has been a recent growing trend in this area.  This 'how to avoid inheritance tax with a mortgage' will show you a way to beat the tax man hands down.

No one likes to think about their old age, especially issues around inheritance tax!  This is a reminder that life isn't infinite.  Worry not, here we have some simple ideas to make today the best it can be, whilst taking care of tomorrow.

If you want to keep your hard earned money in the family, you need to think of ways of avoiding inheritance tax today.  Here we have tips and advice in tax avoidance - made easy!

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There are only two guarantees in life and that is death and taxes!

40% Inheritance Tax On Estate Worth Over £325,000!

Inheritance tax is a massive 40% on an estate worth more than £325,000.00. This includes the house for which you live in as well as your personal possessions and savings. So, how can you keep your life-time estate out of the hands of the tax man?

This is a difficult one, but planning is the key. Providing you live for seven years after gifting money, you can give money to grandchildren and children as a way to avoid inheritance tax. By keeping your threshold below the £325 K, your money is more likely to be directed to a family source than the bowler hatted tax man. Provided, of course, the Government decides to change the rules in the meantime.

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The Secret To Avoid Inheritance Tax

Many clever over 50's have another secret way to avoid inheritance tax.

Instead of paying off their mortgages, they switch to an interest only mortgage with out intention of paying off the balance.

This is a rather clever move because, on their death, the loan is deducted from the total estate, leaving the balance below the 40% inheritance tax threshold. Leaving Mr Taxman with nil!

They have planed for this with foresight and that is all it takes.

With interest rates being the lowest ever, this strategy is something of a win/win for families with older parents.

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Keep Your Mortgage - Avoid Tax Liability!

In these times where it is difficult for first time buyers to get on the property ladder, this is a great solution in giving children and grandchildren a helping hand. Surely, it is better to keep the money in the family than hand it to the Governement?

Keeping your mortgage, however, won't save you tax if the money remains in your estate, i.e. a savings account, so the best thing to do is give it away! It helps you and it doesn't help the tax man!

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Sounds Great But Where's The Catch?

Yes, there is always a catch. Firstly, life holds no guarantees and neither does death! If you were to live beyond 90 years of age, the benefits could be wiped out with the interest payments. However, how can anyone predict the future in your own mortality or even what the changes the Government may put in place! We can but plan for the worse and prepare for the best. There is always one sure way of making God laugh and that is to tell him your plans!

Secondly, not every lender will let you keep your mortgage into retirement. In fact, many won't offer a mortgage to people beyond the age of 75. This means you will be forced into paying the mortgage off whether you want to or not! However, there does seem to be a market here and it won't be too long before financial institutions start to think in terms of getting additional money from older people with no risk of losing it!

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Interest Only Mortgage? Why Not Be Tax Efficient!

For people who have an estate above this threshold, there is no doubt that money, without the risk, on an interest only mortgage would not sound attractive in bolstering the coffers of financial institutions.

At the end of the day, equity release has been busted as a poor financial option and, as money to the banks are like fridges to magnets, it seems sensible for banks to offer mortgages to the elderly. This is, afterall, a growing group in the population and banks have had a history of swindling the Government out of funds, so why not screw them for the inheritance tax as well?

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Tips On How To Avoid Inheritance Tax By Planning

So, do you know for sure that your family will be clobbered for inheritance tax? Here are some tips:

  1. Check to see if you qualify for the inheritance tax bill. Most people won't have enough in the estate that goes above the inheritance tax threshold.
  2. Married couples can transfer their allowance to eat other making the allowance £650,000.00
  3. House prices have fallen recently. This could make a big difference. What would have qualified three years ago, may not qualify today.
  4. You can give away your allowance of £3,000.00 each year and this will be considered outside of your estate. If you didn't use up last year's allowance, you can add it to this years.
  5. Small tax free gifts of up to £250 can be gifted to as many people as you like.
  6. You can make gifts out of your income if you class it as 'Normal Expenditure'. I.e. something that supports your current lifestyle.

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Planning Is The Key To Avoid Inheritance Tax

Planning.  This is the key in learning how to avoid inheritance tax with a mortgage.  Find out if you are actually over the thresh hold to start with.  Depending on the stage of life you are at (there is a big difference, for example, of a 50 year old compared to an 80 year old as regards to loans and risk), make a financial plan that incorporates gifting, as well as setting up a mortgage.  This is about having an informed choice and using this time to help family members whilst you are still in young enough to survive the Governement's inheritance tax criteria.  Good luck with this!

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    • shazwellyn profile imageAUTHOR


      8 years ago from Great Britain

      Thanks Simone - it is all about planning! Plan for the best and plan for the worse - that way you cover all angles! Thanks for popping by :)

    • Simone Smith profile image

      Simone Haruko Smith 

      8 years ago from San Francisco

      Very interesting! I hadn't realized this would be a way around inheritance tax. I wonder if more and more people will be doing this in the future O_O

    • shazwellyn profile imageAUTHOR


      8 years ago from Great Britain

      Jed... probably the best way to go!

    • Jed Fisher profile image

      Jed Fisher 

      8 years ago from Oklahoma

      "I, being of sound mind, spent all my money..."


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