In August 2016, The Daily Telegraph reported a new financial trend in older people wanting to pass on some of the equity tied up in their home to their middle-aged children, rather than wait until they die.
An example given by The Telegraph is where an elderly parent borrows £200,000 from the value of their home. This is then gifted to their children, who agree to cover the monthly £717 interest payment on the mortgage.
If the parent dies a few years later, then the £200,000 that was gifted is not part of the estate and is not subject to inheritance tax. The interest paid on the loan for nine or ten years would have amounted to about £77,400 at current interest rates. If the £200,000 had been part of the estate, the tax paid would have been £80,000. Although this is not a huge saving, the core benefit is that the money is available when it is most needed by the children, who may use it to purchase a bigger house as their family grows, or to pay for private education.
This type of remortgaging is an alternative to the standard equity release where the money is used solely by the home owner. An insurance broker can arrange a mortgage for an elderly person, and also advise on mortgage insurance.