Tax savings and high returns on investment continue to make mortgages an attractive proposition for High-Net-Worth (HNW) individuals purchasing in the UK.
After years of historic lows, rising interest rates have dominated headlines but there are several reasons why wealthy buyers looking for properties in the UK should still be considering leveraging debt in today’s market, says Knight Frank Finance Head of Private Office, Alex Ogario.
Inheritance tax (IHT) is one of the most compelling reasons to consider a mortgage, with individual owners of properties in the UK normally subject to a 40% inheritance tax (IHT) for estates worth over £325,000 upon their death* (depending on their circumstance, with different rules in place for properties owned in a different way). For purchasers of high value properties, taking a mortgage could reduce their liabilities by millions.
“Your IHT liability is calculated on the value of your estate,” explains Alex. “So, by establishing a mortgage debt on your property at acquisition, you’re reducing the value of your estate and in turn your tax burden.”
The IHT liability for an individual purchasing a property in cash valued at £30m, for example, could hit nearly £12m. If that same individual opted to take out a mortgage upon purchase, based on a 70% Loan-to-Value (LTV) (borrowing £21m), that IHT burden could reduce to just under £4m.
With £21m in cash now available to invest, the individual in this scenario may decide to take advantage of the relatively high interest rates available on cash investments or bonds at present. Certain private banks, for example, are offering fixed-term deposit rates of around 6% for investments of this size*. Although, all clients should seek independent, professional tax and investment advice to understand whether this could benefit them.
Those residing in zero income tax environments wouldn’t have to pay tax on this, which means the interest gained on the cash investment would effectively cancel out a large amount of the cost of taking the mortgage, with some mortgage interest rates sitting at similar levels of around 6% at the time of writing.
“So, you can see how there are some very good reasons to still take out a mortgage – debt remains a very interesting proposition,” says Alex.
“Particularly, if you’re looking at this on a risk adjusted basis, it's a lower risk profile transaction to what it may have been a few years ago in a lower rate environment. If you did the same thing, say two years ago and invested the money you weren’t putting into a property in cash, you would have been returning very, very low amounts in Sterling. The difference between the mortgage cost and the gross cash deposit rate would have probably been wider than now in many cases.
“So, you would’ve had to take more risk to get the same return. While that may have been possible, risk adjusted, this is actually an interesting position to be in, but it’s not really something that’s being discussed.”
If you would like to discuss the borrowing options available to you, or those of a client, please contact us at mortgages@knightfrankfinance.com.
*The information contained in this article is for example purposes only and is based on a set of theoretical assumptions that will not apply to all clients. Knight Frank Finance provides mortgage advice, and nothing within this article should be construed as tax advice, investment advice, or an endorsement of a particular investment strategy or product. Different rules and tax thresholds apply to different circumstances and individuals. If you are interested in exploring any of the issues raised, please seek professional tax and investment advice.