Inheritance tax question - Releasing equity through BTL mortgage

marcusjames

Hoping someone will be able to offer advice.

A family friend (aged 74) has asked for advice on releasing equity from his two Buy to Let properties. His plan is to enjoy the money while he’s “young” enough. He has never married and has no children. There are distant nieces who will inherit the remainder of his estate (total estate circa £800K).

He initially considered selling the two properties but this would incur Capital Gains. His private pensions push just him to a 40% marginal income tax rate and so CGT would be 28%! He has owned the two BTLs since before the 1980s so gain would be relatively high.

I mentioned that he could take out BTL mortgages to release the equity. I am assuming the mortgage would be considered in his estate valuation for IHT. My thoughts are that doing nothing would incur 40% IHT and selling would incur 28% CGT. Taking out a BTL mortgage could give him some fun money whilst reducing the estate for IHT.

He is in remission from cancer but not in the best of health.

Is my proposal sensible?

getmore4less

Might be simpler to sell his own house(if he has one) and move into one of the rentals or just rent somewhere else.

With a 40% income(£3kpm) and a load of cash he would have options

marcusjames

Thanks for the reply. I did make a suggestion about the home but he is against that as he was born in his home. His father built it and he has huge sentimental attachment to it.

00ec25

so in relative terms he has a significant level of income already given he is retired, but his health is failing and time is running out.

who is suggesting he "needs" fun money: you or him? Why is he bothered about the size of his estate given his beneficiaries are distant nieces and presumably you are not one of them so he has little interest in exactly how much they will get post tax?

in principle he could take out an interest only BTL mortgage on one or both properties and release a lump sum of fun money by so doing. The o/s balance on death would as you say be a charge against the estate and presumably (subject to house price movements) be covered from the sales proceeds of the properties upon liquidation of his estate.

getmore4less

Does he really want to be bothered with a letting business how much of his £45k income comes from those?

marcusjames

00ec25 wrote: »

who is suggesting he "needs" fun money: you or him? Why is he bothered about the size of his estate given his beneficiaries are distant nieces and presumably you are not one of them so he has little interest in exactly how much they will get post tax?

Everything is driven by him. He has written a bucket list and wants to work his way through it.


I have asked about his appetite for being a landlord at 74. He is turned off by the CGT liability if he sells.


I think he is torn between enjoying his final years but also maximising the estate for his nieces. I don't think they necessarily need the money but it's not my place to push him to spend.


Thanks for the replies so far.

00ec25

marcusjames wrote: »

I think he is torn between enjoying his final years but also maximising the estate for his nieces. I don't think they necessarily need the money but it's not my place to push him to spend.

well he can't have it both ways so if your role is simply to advise him then the answer is: yes, in principle.

He may be able to get a BTL mortgage but he would need to speak to a mortgage broker as some lenders put limitations on what the borrowed money can be used for (eg further property purchase only) so he may find himself with a limited number of borrowers with higher rates given what he wants is fun money

Keep_pedalling

He could look at equity release on his own home, but he really needs to make sure he spends that on his bucket list.

KJ_3892

Hi there,

I know that they are now starting to introduce equity release plans - lifetime mortgages - for buy to let properties. This could give him access to the decrease the value of his estate, without necessarily affecting his ability to pass on the family home that he currently lives in.

He'd also avoid the CGT and still be able to rely on the rental income from the rental properties.