How can I cut a potential inheritance tax bill?
Each UK resident has a Nil Rate Band of currently* £325,000 if the estate exceeds this on death the amount over the nil rate band is taxed at 40%*. There are several different ways to reduce your Inheritance Tax bill:
Make outright gifts
Set up a trust
Keep your assets while reducing your estate
Managing Inheritance Tax without making gifts
Raising debt against the estate for example an equity release mortgage
Or simply accept the tax and hold a life assurance policy in trust to allocate funds to this
*Correct as of July 2018
What is Estate Planning?
Estate Planning involves passing on more of your assets to your children and others by reducing your potential Inheritance Tax bill. This usually involves making financial gifts but there are other options available.
What should I consider prior to making a will?
Change in family relationships: if you have married, entered into a civil partnership, moved in with your partner, divorced, separated, had a civil partnership dissolved, been widowed or are a surviving civil partner.
Family Growth: if you have become a parent, grandparent, see your family grow, or children have entered your life through a new relationship.
Guardianship: if you have minor children a legal guardian can be named in your will with directions to the guardian.
Reserve beneficiaries: A will can fail due to beneficiaries predeceasing you it is prudent to name a reserve beneficiary to avoid dying intestate.
Should I try and think of every possible situation and try and cater for it in my Will?
No. Making a Will isn’t a once in a lifetime event, so you don’t have to squeeze everything into it! A Will should reflect your circumstances as they are now, not what they might be in the future. We recommend that you should review your Will every five years or so, to make sure it is still appropriate for your circumstances.
If I take out an equity release scheme, do I risk losing my home?
No. For a lifetim mortgage the amount of money you borrow against the value of your home, plus any rolled-up interest, can never go above the value of the property – when it is sold at the end of your plan – due to the No Negative Equity Guarantee.
It is worth nothing that with a Home Reversion Plan* you do sell a percentage of your home.
*We do not provide advice on Home Reversion Plans.
What impact will Equity Release have on my family?
Taking out an equity release plan could leave your family with little or nothing to inherit from your property. You need to be comfortable with this possible outcome and may wish to discuss it with them before committing yourself. You may also want to consider including your family in any discussions you have with your financial adviser or your solicitor.
You may be considering releasing equity from your home to help younger family members get on to the property ladder or pay for school or university fees etc. If this is the case, you need to consider the implications of releasing the equity now, as it will not be available later should you need it for other purposes
What criteria do I have to satisfy for Equity Release?
Lifetime mortgages are suitable for individuals or couples who own their own home which is their main residential property. To qualify for a lifetime mortgage, you need to be aged 55 and over. If you are taking out the plan with your partner, then the age of the youngest borrower must be at least 55. For a home reversion plans you must be a minimum of 60 years old. A valuation will form part of the application process to establish if the property is suitable as security.
How much does life assurance cost?
Your premium will vary depending on the type of policy, the size of the sum insured and the risk of a claim – if you have a dangerous job, for example.
Also, age is a factor, so life insurance will be more expensive for an older person. Similarly, if a customer is in poor health, they can expect to pay a higher premium.
The insurer will consider occupation, hobbies, lifestyle – such as weight and fitness – to help determine their premiums.
Why do I need life insurance?
Life assurance is optional however there are many reasons to have it in place, for example if you have a partner or family who may struggle to cope financially, then life insurance could offer the help they need at a very difficult time.
What is life insurance with decreasing cover?
A decreasing term policy provides a level of cover which decreases throughout the term of the policy, broadly in line with a repayment loan or mortgage. This is usually a cost-effective way to achieve the required level of cover.
How much life insurance do I need?
It depends on your individual circumstances. You may want to think about leaving a lump sum to your dependants, inherence tax & estate planning or help clear an outstanding mortgage on your death.
Why do I need a broker, can’t I just go to my bank?
The main advantage of using a broker as opposed to your own bank is the access to a wider choice of lenders, independent advisers can access the whole of the market where as banks will only offer their own products which may not necessarily be the best suited to you.
What is a capital and repayment mortgage?
A repayment mortgage is a term generally used in the UK to describe a mortgage in which the monthly repayments consist of repaying the capital amount borrowed as well as the accrued interest, so that the amount borrowed decreases throughout the term and by the end of the loan term has been fully repaid.
How do I arrange a Decision in Principle?
The initial stage in mortgage application process can be known as; Decision In Principle (DIP), Agreement In Principle (AIP) or a Mortgage Promise… they are all the exact same thing.
Your broker will be able to arrange a DIP for you. They will learn about you and your requirements and apply on your behalf to a suitable mortgage lender. All being well the lender will provide you with a certificate which you can present to Estate Agents to prove you have been accepted in principle for a mortgage.
What happens if I do not have a Will?
If you pass away without a Will, you will leave your loved ones with far more work to do after your death. It is highly likely that your possessions will not be distributed the way you want.
Instead, the government has laid down rules called intestacy rules which state who has authority to act on the distribution of your estate. These government rules also stipulate who will inherit your property and possessions. It is unlikely this will match your own wishes and it typically has a negative tax consequence as well as cause potential heartache. For example a partner may not receive anything, a house could be split and other wishes may not be followed.
What is the difference between a Lifetime Mortgage and a Home Reversion Plan?
The main difference between a lifetime mortgage and a home reversion plan is when you take out a lifetime mortgage you retain ownership of your home. With home reversion plans, you sell a share of your home in exchange for a lump sum of money or a lifetime of regular income.
The other difference is that with a lifetime mortgage, a fixed interest rate is agreed at the time you take out the plan. This interest builds up as compound interest over the years. With home reversion plans, there is no interest to pay as it is technically not a loan. However, if your property increases in value, you will only benefit from the increase in value of the proportion you still own.
We do not provide advice on home reversion plans.
What is a Will?
A Will is a document created to give directions for the distribution of the assets you own on death.
Your properties, assets and belongings (commonly called your Estate) are divided up as per your wishes and passed to whomever you chose known as Beneficiaries.
The Will also indicates who will manage the distribution of your your estate. This chosen person is known as the Executor(s) of your Will. They are also responsible to appoint Guardians to look after minor children when both parents have died.
For a Will to be effective and legally binding it must conform to certain legal conditions (as per the Wills Act 1837) and be signed by the person making the Will in front of two adult independent witnesses present at the same time.
What’s the difference between Terminal Illness Cover and Critical Illness Cover?
Terminal Illness Cover is usually included in Life Assurance policies at no extra cost. It could pay out your chosen amount of cover if you’re diagnosed with a terminal illness and have a life expectancy of 12 months or less, rather than on death.
Critical Illness Cover is an additional policy. It’s designed to pay out your chosen amount of cover if you’re diagnosed with one of the providers specified critical illnesses (for example heart attack, stroke etc) during the length of your policy.
How much can I borrow for a Mortgage?
‘How much can I borrow?’ is the most common question asked by people looking to raise a mortgage.
The answer is not simple, it involves multiple personal factors on income and expenditure as well as varying lender criteria. In April 2014 the F.C.A released new regulation called the Mortgage Market Review (MMR). This regulation tightened up affordability checks and put more responsibility on mortgage lenders to ensure borrowers could afford the mortgages they were taking out. Since MMR lenders hide behind affordability calculators which ask a range of questions relevant to their criteria and then produce a maximum mortgage amount.
Your brokers job is to find out all they can about your income and expenditure and research the market to find a mortgage suitable for your needs. We have a handy affordability calculator on this site (click here) which will give you a very rough idea of what could be a reasonable expectation but please ask your broker for a more accurate figure as this is just to be used as a ball park guide.
Every lender has their own criteria when it comes to what they will and will not accept for income. Some lenders will look at and take 100% of your bonuses, overtime and commissions into consideration while others may only take 50%. It is also common for lenders to have varying opinions on your expenditure, some will take pension payments and child care costs into their calculations while others will ignore them and have built it into their calculations already.
Due to the complex nature of affordability we would always recommend taking Independent Advice on your situation.
How much can I borrow for Equity Release?
Equity Release is the umbrella term for two types of financial products:
Lifetime Mortgages – a mortgage in which the debt is repaid upon death or long term care. You retain ownership of your home.
Home Reversion Plan – where you sell your home at a big discount but are allowed to live there until death or long term care.
We do not provide advice on Home Reversion Plans so this answer will only be in regards to a Lifetime Mortgage.
The borrowing amount on a Lifetime Mortgage is based on two main factors; The youngest borrowers age and the value of the property.
Lifetime mortgage providers have calculations where they take borrowers ages vs the value of the property and provide a maximum loan figure. We have a handy calculator on this site (click here) which will give you a rough idea as to what could be achieved. This is only to be used to give a ball park figures and your broker will be able to research the market for you to get you an accurate figure.
What is Life Assurance and how does it work?
Life Assurance is an insurance policy that helps to protect your loved ones financially in the event of your death. You choose the amount of cover you need and the length of time you want to be insured for.
It could be used to help repay a mortgage or help protect the family’s lifestyle and everyday living expenses. Life assurance is also known as life insurance, mortgage protection or level term assurance.