How low interest rates could affect your Estate Planning

The historically low interest rate environment has been hard on savers, but arguably good for investors as cash has flooded into the stock market in search of returns. But it could also be affecting your estate planning, without you even realising it. Gary Smith, chartered financial planner at Tilney, looks at how low interest rates are having a direct impact on the main residence nil rate band, which was introduced on 6 April 2017 to try and fulfil a long-standing Conservative pledge to reduce the number of estates being hit by inheritance tax due.

“Having spoken to many clients and solicitors, it has become clear that the main residence nil rate band (MRNRB) is a complete minefield. People simply don’t have a clear understanding of the qualifying criteria and therefore risk missing out on this valuable allowance.

“Under current rules, a married couple potentially has an allowance of £100,000 each under the MRNRB. However, this allowance is only available if you leave your property to a direct descendant (child or grandchild), the value of your estate exceeds £650,000 but is less than £2 million and you have sufficient equity in your home to use the full allowance. The main crux of this tax allowance is that it is only available for equity in the house and not the overall estate. For example, if a couple owns a house valued at £500,000 with a mortgage of £375,000, then only £125,000 (the equity) can be used for the MRNRB and not the £200,000 that a married couple might assume they could claim via their respective allowances. They would therefore be losing out on £75,000 of allowance by having the mortgage in place, resulting in potentially £30,000 of inheritance tax. This would be the case even if the individual had life cover in place to repay the mortgage on their death, as the mortgage would have to be declared on the HMRC Inheritance Tax documents prior to Probate being granted.

“Historically, paying off a mortgage and other debt would be a top priority. However, due to the low interest rate environment, many people are instead choosing to invest spare capital rather than repay their mortgage. And this totally changes the conversation, as the potential inheritance tax implications of not repaying the mortgage now need to be considered.

“People are not necessarily prioritising paying off their mortgage as their capital is then tied up, whereas it is much more flexible to invest it . They can obviously apply for another mortgage to release some capital, but this can incur fees which many are unwilling to do. Instead of tying their capital up in a mortgage, they could instead, for example, be putting it into an ISA which is taxable under current IHT laws.

“There will of course be many people in their later life who have paid off their mortgage and therefore this won’t be a problem. However, if people from a slightly younger generation intend to keep on investing rather than repaying debt, it is imperative they regularly review their will and seek guidance from a financial planner.”

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Important Information:

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested

Advice in relation to Inheritance Tax Planning is not regulated by the Financial Conduct Authority. However, the products used in relation to mitigate Inheritance Tax may be regulated. Please note we do not provide tax advice.

This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.