Inheritance Tax (IHT) has become one of the most pressing issues facing families in the UK. With property values rising over the past decade — and IHT thresholds frozen — more and more estates are falling into the tax net. For property owners, landlords, and high-net-worth individuals, it’s no longer a tax that only affects the very wealthy.

Property finance, particularly the strategic use of mortgages, is emerging as a critical tool in estate planning. In 2025, families are increasingly looking beyond wills and trusts to understand how leverage, structuring, and debt can play a role in reducing liabilities and protecting generational wealth.

In this blog, we’ll explore how mortgages interact with inheritance tax, what strategies families are using, and how Willow Private Finance helps clients plan ahead.

The Growing Inheritance Tax Challenge

The nil-rate band — the amount you can pass on tax-free — has been frozen at £325,000 since 2009. The residence nil-rate band, designed to soften the blow, adds a further £175,000 where a main home is left to direct descendants. But with average house prices in many parts of the UK now well above £500,000, families who never considered themselves wealthy suddenly face a potential 40% tax bill on death.

For example, a married couple leaving a London home worth £1.5 million plus other assets could easily face an IHT bill exceeding £400,000. This has profound implications: estates are sometimes forced to sell property quickly, investments are liquidated, and beneficiaries inherit less.

That’s where smart property finance comes in.

How Mortgages Reduce the Taxable Value of an Estate

At its core, inheritance tax is charged on the net value of the estate — assets minus liabilities. Mortgages are a liability. A property with a £1 million value and a £500,000 mortgage has a taxable value of £500,000 rather than the full £1 million.

Some families intentionally use borrowing to reduce the net estate value and, in turn, the tax exposure. This isn’t about loading up with debt recklessly — it’s about understanding the trade-off between inheritance tax, leverage, and wealth preservation.

Of course, HMRC has tightened rules on contrived debt arrangements, but properly structured borrowing against UK or overseas property remains a legitimate estate planning tool.

Interest-Only Mortgages and Wealth Preservation

One of the most practical tools is the interest-only mortgage. For high-value properties, taking a long-term interest-only facility allows families to access liquidity during life — for investment, gifting, or wealth transfer — while also reducing the taxable estate.

For example, a family may refinance a £2 million property with a £1 million interest-only loan. They might then use part of that liquidity to make gifts to children or fund trusts. Provided they survive seven years, those gifts fall outside the estate, reducing the eventual tax bill.

This strategy is increasingly popular among clients with substantial property wealth but limited liquid assets — often landlords, retirees with portfolio holdings, or professionals with equity-rich main residences.

Mortgages, Trusts, and Wealth Transfer

Mortgages can also interact with trust planning. Where a trust owns property with mortgage finance, the debt helps keep the trust’s value lower, reducing exposure to periodic charges. Similarly, where parents hold mortgaged buy-to-let properties in a limited company, shares may be transferred at a lower valuation than if the properties were debt-free.

We recently covered this angle in our blog on Inheritance Tax Planning with Whole of Life Policies, where protection and finance work hand in hand. Mortgages can complement insurance-based strategies to create a balanced, tax-efficient estate plan.

Cross-Border Considerations

For UK residents with overseas property — a holiday villa in France or Spain, for example — IHT planning becomes even more complex. Local succession laws, tax treaties, and lender requirements vary by jurisdiction. However, the principle remains: debt secured against overseas property can reduce the estate value for UK tax purposes.

We’ve explored some of these international nuances in our piece on Second Homes and Holiday Villas Abroad: Financing Options for UK Residents in 2025. When combined with IHT planning, cross-border finance requires careful structuring and the right specialist lender.

The Role of Property Developers and Landlords

It’s not just families with a single main home who need to think about this. Professional landlords and property developers are often sitting on millions of pounds in real estate value. While they may see themselves as business owners rather than “wealthy individuals,” HMRC views their portfolios as part of their estate.

Mortgages can mitigate this exposure, especially when combined with corporate structuring through SPVs and limited companies. Our blog on SPVs vs. Trading Companies: What Landlords Must Know in 2025 highlights some of the practical differences, many of which have direct estate planning implications.

Why 2025 Is Different

The debate around inheritance tax has intensified in 2025. With government spending commitments rising and IHT receipts already hitting record levels, the chance of thresholds increasing any time soon is slim. In fact, the opposite is more likely: more aggressive enforcement and fewer exemptions.

At the same time, property values in key regions have stabilised rather than fallen dramatically. That means more families are “stuck in the middle” — not wealthy enough to use elaborate tax schemes, but wealthy enough to face significant IHT bills. For them, mortgages are becoming an increasingly practical estate planning tool.

How Willow Can Help

At Willow Private Finance, we specialise in helping clients use property finance intelligently — not just to buy or refinance, but to plan for the bigger picture.

We work with:

• Families looking to reduce inheritance tax exposure on their homes or investment properties.
• Landlords and portfolio owners who want to structure debt and company holdings efficiently.
• High-net-worth individuals with UK and international property assets who require bespoke planning.

Because we are whole of market, we can access lenders who understand the nuances of IHT planning — from private banks willing to offer long-term interest-only facilities to specialist lenders comfortable with cross-border security.

Crucially, we work alongside clients’ accountants, tax advisers, and solicitors to ensure finance fits within the wider estate plan. A mortgage in isolation is not enough — it must be part of a joined-up strategy that balances liquidity, tax efficiency, and legacy planning.

Frequently Asked Questions

How can mortgages help manage inheritance tax (IHT) in 2025?
Mortgages can reduce the taxable estate by lowering net property value. Paired with life insurance or trusts, this ensures liquidity to meet HMRC’s IHT bill without forcing distressed property sales.

Are interest-only mortgages useful in IHT planning?
Yes—interest-only mortgages allow families to maintain leverage while retaining capital. On death, repayment can be matched to insurance or estate proceeds, helping manage timing of IHT liabilities.

What role do whole-of-life policies play alongside mortgages?
Whole-of-life policies can be written in trust to pay out tax-free on death, directly covering IHT. When linked to leveraged property, this prevents beneficiaries needing to liquidate assets.

Do lenders consider estate planning when offering mortgages?
Specialist and private banks often do—structuring terms with family succession, trust ownership, or cross-border wealth planning in mind. High street lenders typically take a narrower view.

Can trusts hold mortgaged property?
Yes, but lender consent is required. Structures vary: property may be held in discretionary trusts, family investment companies, or via offshore vehicles, each with different legal/tax implications.

What risks come with using mortgages for IHT mitigation?
Risks include over-leveraging, interest rate exposure, complex trustee/beneficiary agreements, lender restrictions, and potential HMRC scrutiny on artificial debt arrangements.

What should families prepare before using mortgages in estate planning?
Obtain professional advice, review tax position, secure up-to-date property valuations, consider liquidity buffers, and align legal structures (trusts, wills) with finance arrangements.

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