Hundreds of thousands of people are relying on the equity in their buy-to-lets and holiday homes for retirement, and a new scheme lets them unlock this cash without selling up — and defer tax in the process.

The plan, from New Life Mortgages, uses an established idea — equity release — and extends it to buy-to-lets, holiday cottages and second homes for the first time.

Called a lifetime mortgage, it allows the over-sixties to turn equity in their second properties into accessible cash without having to sell up or pay anything back during their lifetime. Interest is “rolled up” and the loan is repaid only when you die, go into long-term care or the house is sold.

The scheme is likely to prove attractive to people who want to get at the equity in their second homes to supplement their pensions, but are reluctant to sell because they want their families to benefit from future growth. They also avoid the big capital-gains-tax (CGT) bill they would pay if they sold up — although they would be passing on the tax liability to their heirs.

The steady rise in house prices means that many buy-to-let investors and second-home owners are sitting on substantial profits. House prices have risen 8 per cent on average over the past year, according to Halifax. An individual who bought a £200,000 home a year ago could already have made a gain of £16,000.

The average buy-to-let portfolio worth £1.5m has been boosted by about £100,000 in the course of the past three months alone, according to Paragon, a mortgage company.

A higher-rate taxpayer who has made a £100,000 gain on a £250,000 holiday home over five years would face a CGT bill of £31,000 if it was sold in his or her lifetime.

However, New Life’s scheme takes advantage of the Revenue rule that profits are revalued at death. When people die and leave their belongings to their family, or indeed anyone else, there is no CGT to pay at the time. When the property is eventually sold, CGT is based on the difference between the proceeds of the sale and the market value at the time of death.

The higher-rate taxpayer above could pass the entire £250,000 property to his or her family CGT-free. A year later the family might sell it for £260,000 and would be assumed to have made a gain of only £10,000 — making the tax bill just £480. They would have to pay inheritance tax (IHT) on the value of the estate above £285,000.

There is another perk for buy-to-let investors, who keep the rental income in full when they use the scheme.

Interest charged on the loan can be offset against the tax on the rental income, even though the interest is rolled up.

Lifetime mortgages are already popular with pensioners keen to unlock cash from their main home, and are often promoted as a way to avoid IHT. However, advisers warn that the interest on the scheme could wipe out any savings. ()

The interest rate on the New Life Mortgage scheme is 6.75 per cent fixed, compared with about 5.5 per cent for ordinary buy-to-let mortgages and 4.75 per cent for standard fixed or discounted loans. Interest is charged on the original loan plus any interest that has already been added, so the amount owed can grow quickly.

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