The Mansion Tax
The Labour budget, delivered on 26th November 2025, introduced a raft of new rules affecting various areas of financial planning: from pensions to savings income and dividend tax rates. Of the measures announced, in terms of expected revenue raised the High Value Council Tax Surcharge was on the lower end of the spectrum, with an expected £0.4 billion to be generated by 2029 – 2030, however that policy – dubbed a ‘mansion tax’ by some quarters in the press – has generated an outsized level of attention relative to its’ economic impact.
The mansion tax will consist of a levy on high value properties, requiring the owners of those properties (not the residents or tenants) to pay a surcharge ranging from £2,500 to £7,500 each year, based on the value of the home in 2026. The surcharge will take effect from April 2028.* Opinion is divided on the benefits of such a policy, with some arguing it will have little impact economically, whilst some argue it is only fair that those fortunate enough to own high-value properties should contribute a little more. On paper, it does not seem unreasonable from my point of view, but one criticism of the policy is that it penalises those who are ‘asset rich but cash poor’.
The purpose of this article is to explore this statement in more detail, and one of the potential solutions for those who consider themselves in the ‘asset rich, cash poor’ category. Property is illiquid by nature. Unlike other types of assets, you can’t simply make a withdrawal like a cash account or sell part of it like you can shares. The value of one’s property does not necessarily speak to the availability of liquid capital elsewhere. In many cases, it would serve as a proxy for that, but for those who really feel unable to pay without resorting to the extremely consequential step of selling their home, a lifetime mortgage may be the perfect solution.
Equity Release aka Lifetime Mortgage
A lifetime mortgage is a form of equity release, a mortgage secured against the home where no monthly payments are required, and where the term is open ended, meaning it can run until death or entry into long-term care. It is not appropriate for everybody, and one of the main disadvantages of this type of mortgage is that the interest compounds over time if no monthly payments are made, meaning higher total interest costs and a reduction in the equity that can be passed on to the borrowers beneficiaries after death. It is possible, however, to arrange what’s known as a ‘drawdown facility’, where the borrower can borrow sums of month in increments: monthly, annually, or whenever required (if at all).
This means that rather than taking a large lump sum at outset, a small initial loan can be taken, with the entitlement to request more later on if required. The key thing to bear in mind is that no interest is charged until the money is borrowed, making this type of lifetime mortgage in particular ideal for funding something such as the High Value Council Tax Surcharge, which by definition is only required once per year. The interest rate on each tranche of money will be based on the rates at the time of requesting the money, not the rates available when the initial advance is taken.
How Equity Release Can Help with the Mansion Tax
It should be noted that having a debt on the property does not negate the need to pay the surcharge, but it could be used to help fund it. Additionally, those required to pay the surcharge will almost certainly have an inheritance tax liability by default, particularly as the residence nil rate band of £175,000 begins to be tapered off for properties in excess of £2 million.
People liable to pay the property surcharge, whose beneficiaries have a potential inheritance liability, can take the view that the net cost borrowing is not as high for them as somebody with no inheritance tax liability. For example, using round numbers for simplicity:
- £2,000,000 property value.
- £100,000 is borrowed via a lifetime mortgage, the interest rate is 6% per annum (£6,000).
- Of this £100,000, 40% (£40,000) was already in line to be taken as inheritance tax, therefore owing it to a mortgage lender instead means the net cost to the estate is only 60% (£60,000).
- If the interest payable is 6% per annum, you could take the view that the real terms cost to the estate is only 3.60% in practice (60% of 6%), allowing for the fact that 40% of that equity would have be payable to HMRC on death anyway.
There is still a cost involved even for those with inheritance tax liabilities, so care must still be taken in applying for an appropriate sum, but the real terms cost is lower in these scenarios. It should also be noted that if funds are borrowed and remain unspent and within the estate on death, those monies are still taxable.
Of course, paying this new property surcharge is just one of the reasons why a drawdown lifetime mortgage could be used. For those with expensive properties but limited retirement income in general, this could be an ideal solution, allowing you to fund income on a monthly or annual basis, limiting the interest incurred from outset as a result. Funding home improvements, one-off expenses or gifting to family members are also common reasons for considering this type of mortgage.
The Unknowns
As with any newly proposed tax increase, there is still the possibility that this will be challenged. There is also no further plan currently available for how properties will be valued. It is also worth noting that this is a proposed initial tax increase, which could go up in the future. If the threshold is frozen in future years, as has been the case with many tax thresholds, it could also end up affecting more properties and people in the future.
Whilst lifetime mortgages are an extremely useful tool available to property owners aged 55+, they are of course not without risk. It is essential to seek professional, independent advice prior to pursuing this as a solution.
By Cain Stennett (a human, not AI)
The Best Advice for You, No Matter Your Circumstances
If you’d like to know more about how a Lifetime Mortgage can impact your finances, please fill out the contact form below. The team at Bigmore Financial Planning will be happy to help guide you to your best financial life.
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