Making the most of your property wealth
Property wealth is playing an increasingly important role in financial planning and a growing number of older homeowners are beginning to think about how to use the equity built up in their property, as David Forsdyke of Knight Frank Finance explains
Homeowners over the age of 55 often have quite distinct financial considerations, compared to other generations. Whilst they have seen tremendous increases in the value of their property over the last 30 years, other assets and investments, including their pension plans, may not have fared so well. As a result, property wealth is increasingly being used in planning for retirement, to help children and grandchildren, for school fees and as part of Inheritance Tax planning, among other priorities in later life. A number of financial products have come onto the market in recent years that allow older homeowners to access the otherwise illiquid wealth built up in their residential property. These include lifetime mortgages, retirement interest-only mortgages, short-term finance and buy-to-let solutions. But how do these products help in practice? To demonstrate, I’ve answered some of the questions I regularly receive from clients.
Why would I take out a mortgage in my retirement?
Borrowing in retirement was historically regarded as a last resort. However attitudes are changing and in reality it can be a shrewd financial decision. Financial advisers are increasingly including property assets alongside other sources of wealth when looking at potential enhancements to their clients’ income, lifestyle and tax efficiency. For example, pension funds benefit from certain tax advantages, and can be left to your beneficiaries tax free if the individual is under 75. Whereas a main residence is subject to Inheritance Tax. This raises an interesting question around tax efficiency and whether it is better to draw funds from property over pension assets.
How can borrowing reduce my Inheritance Tax?
If you borrow against your home via a mortgage and gift the equity to your children, it becomes known as a potentially exempt transfer (PET). A PET allows you to make unlimited gifts which are exempt from Inheritance Tax if you live for the following seven years (there will be tax payable on a sliding scale if you pass away within seven years). Depending on your age and life expectancy, this can be a worthwhile solution, as it reduces the overall value of your estate and therefore the Inheritance Tax due when you pass away. Individual situations vary so seeking professional advice is always recommended.
How can I help my family using the equity in my property?
The ‘Bank of Mum and Dad’ is becoming more and more important in today’s property market. Under 35s increasingly need help from parents, grandparents or other family members to get on the property ladder. For many, this is done by releasing the equity built up in property through a lifetime mortgage or other form of borrowing. Grandparents often want to contribute to school fees, and the draw-down facility that is available with a lifetime mortgage can be a great way for them to access small, but not insignificant, lump sums when the educational bills come in. The cost of this type of borrowing has dropped dramatically recently. In some cases I’ve suggested children pay the interest for their parents or grandparents because it’s actually cheaper than borrowing the money themselves.
What else can I do with my property wealth?
Lifetime mortgages are often used for home or garden improvements. Later life can bring a need for adjustments around the home which make life easier, and if such improvements enhance the value of your property you could argue this is a very wise use of the borrowing. Another common use of these products is to tidy up existing debts. Retiring with a mortgage, secured or unsecured debts still lingering can be a worry. We see many clients making use of the products now available to consolidate debt and improve their cashflow as they transition into full or semi-retirement.
David Forsdyke is Knight Frank’s Later Life Finance expert. He has previously worked for the Financial Conduct Authority and the Equity Release Council and has over 15 years’ experience in the Later Life Finance industry. Contact David directly for trusted financial advice on 01483 947 764 or email email@example.com