Harnessing a lifetime mortgage for a wealth management

Harnessing a lifetime mortgage for wealth management

Case Study by John Harris, Cooper Associates Group

Posted by Standard Life Home Finance

(Stock image and client not named)

The client in this case was an 82-year-old widow with substantial financial assets, including cash reserves and pensions. She owned a London townhouse valued at £1.7m and had three children living abroad. While two of her sons were financially independent, the third could benefit from additional financial support. Her primary goals were to minimise the inheritance tax (IHT) burden on her estate and potentially provide for her children during her lifetime. Additionally, she wanted to ensure she had sufficient resources for potential future care costs while continuing to live in her home.

They explored a variety of options to secure her future care needs and optimise her estate planning while enabling gifts to her children. Through a lifetime mortgage, she could reduce the taxable value of her estate by making gifts from the mortgage proceeds, thereby helping to mitigate potential IHT liabilities. The overarching aim was to secure her family’s financial future in the most tax-efficient manner possible.

Providing her sons with immediate financial assistance allowed them to benefit from her wealth during her lifetime while also potentially lowering the IHT liability. One critical consideration was the 7-year rule related to gifts and the risk of tax liabilities if the client were to pass away within that period. They discussed strategies to mitigate this risk, but the client and her sons were confident about proceeding, given her good health and family history of longevity.

Decision-Making Process
Several financial products were reviewed, but the lifetime mortgage emerged as the most suitable option. This decision was based on the client’s limited income, inability to commit to regular repayments, and strong preference to remain in her home. Her desire to stay in her property was a key factor that ruled out alternatives like downsizing.

With a property valuation of circa £1.7m, the client released a loan amount of £776k to meet her financial objectives. Standard Life Home Finance was recommended due to the competitive pricing of their Horizon range and its flexible features, including downsizing protection from day one and 8-year fixed early repayment charges (ERCs). These features offered the client peace of mind in managing her estate effectively.

An additional benefit of taking out the mortgage was bringing the client’s estate back under the £2m threshold. This adjustment allowed her to regain both her own and her inherited residence nil rate bands, significantly improving the estate’s tax efficiency.

Delivering Positive Customer Outcomes
By gifting funds to her sons using the equity released from her property, the client was able to provide early inheritance benefits while reducing her taxable estate. Furthermore, involving her sons in the decision-making process fostered transparency and alignment with their long-term financial goals.

They also recommended that the client update her Will to ensure her estate planning reflected her intentions. This approach provided her with financial clarity and reassurance, knowing she could remain comfortably in her home while witnessing her sons benefit from her wealth.

Additionally, due to Horizon’s 8-year fixed ERCs that decrease annually, the client retained flexibility to review the mortgage in the future. This ensured her estate planning remained adaptable to any changes in her health or financial situation. Specialist IHT advice complemented their recommendation, ensuring the client received comprehensive guidance throughout the process. The collaboration between the adviser, wealth management team, and Standard Life Home Finance’s support staff facilitated a seamless and efficient experience.

Final Thoughts
This case highlights the complexities of estate planning, particularly when balancing immediate family support with long-term financial security. The lifetime mortgage proved to be an effective tool, providing flexibility for a client with limited income but substantial property assets.

It allowed the client to address immediate needs, such as supporting her son and reducing IHT exposure, without jeopardising her financial stability. The case underscores the value of customised financial solutions tailored to the client’s personal circumstances, estate size, and health considerations.

A lifetime mortgage can be a strategic financial planning tool, especially when inheritance tax and family support are priorities. However, such decisions should be approached with careful planning, weighing all options and considering their long-term implications.