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Is paying off mortgage on jointly owned property, deprivation of assets?

Sorry, this is really long.

20 years ago, while in perfect health, my father bought a buy to let property in his name and mine. An interest only mortgage was taken out in both our names, which he paid, and in turn he received all the rental payment. The idea was that he would benefit that way, and when he sold it (which he intended to do after three years) we would benefit from the profit. But the house price tanked so he continued to let it. 
Five years later he had a massive stroke, and has required care ever since. When the mortgage term ended a further five years on, much of his remaining capital was used to discharge the mortgage debt. 

For the last few years, since his liquid funds ran out, the council has been deferring payment on the balance of his monthly care costs (after his benefits and the rental income have contributed to it). I continue not to benefit in any way from the rental property. 

When he dies, and as a joint tenant, the property becomes mine, will the payment of the mortgage balance ten years ago be seen as deprivation of assets? Or as it was a debt, will it not count (or maybe only half of it count?)
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Comments

  • Keep_pedalling
    Keep_pedalling Posts: 18,128 Forumite
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    How is the property owned? It sounds like he is the sole beneficial owner as far as IT and IHT is concerned, but I am not sure how that effects debts owed by his estate estate when the time comes. 
  • sclare
    sclare Posts: 91 Forumite
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    The property is registered in both our names as joint tenants. IHT is not an issue, as he won't come anywhere near the threshold. 

    The only issue is the possible deprivation of assets regarding his care.
  • NedS
    NedS Posts: 3,978 Forumite
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    I'm not sure what you are asking.
    Are you asking would the local authority view paying off the mortgage as deprivation of capital to avoid care costs? I doubt it, as at the time your father paid off the mortgage, could he have foreseen he would have a stroke five years later and would need care?
    I guess what will happen is that the local authority will expect the care costs to be settled from his estate upon his death. If the house is jointly owned, would you have enough cash to settle the care home costs and keep the house, or would the house need to be sold to realise his half of the asset?

  • Keep_pedalling
    Keep_pedalling Posts: 18,128 Forumite
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    NedS said:
    I'm not sure what you are asking.
    Are you asking would the local authority view paying off the mortgage as deprivation of capital to avoid care costs? I doubt it, as at the time your father paid off the mortgage, could he have foreseen he would have a stroke five years later and would need care?
    I guess what will happen is that the local authority will expect the care costs to be settled from his estate upon his death. If the house is jointly owned, would you have enough cash to settle the care home costs and keep the house, or would the house need to be sold to realise his half of the asset?

    From the opening post it seems he was already receiving care when the mortgage was paid off. It’s a bit complicated as although the OPs father has met all the loan costs he has also received all the revenue which has gone towards his care costs. 

    My take on this is that as the beneficial owner the OPs father would have been responsible for all the expenses associated with the house so paying off the loan is not deprivation of assets. It would also have also have recused the ongoing expenses so freeing up more of the rental to pay ongoing care costs.

  • sclare
    sclare Posts: 91 Forumite
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    edited 20 August 2023 at 2:32PM
    You have it right @Keep_pedalling. He was fit and well when the house was purchased and the mortgage taken out, but had been in receipt of care for several years when the interest only mortgage term ended. 

    Also you make a good point regarding the whole of the rental income then becoming available to go towards care costs. 
  • Grumpy_chap
    Grumpy_chap Posts: 16,224 Forumite
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    It is a bit complicated but, clearing the debt is probably not DoA, from what it sounds.

    The simplest things is probably to sell the BTL, or sell whenever it next naturally becomes vacant.

    The thing I can see a LA challenging is whether the property is truly half owned by the OP or 100% owned by the father.  
    From what I read:
    • The father paid for the property and received all the benefit from the property. 
    • The OP has not contributed to the property, nor gained beneficial interest from the property.
    Is that correct?
    I have re-read the OP to see whether I missed anything, but still that seems to be how this was structured - all the father's input and output and the OP was only a joint owner but with no interest in the property.  

    I can see, therefore, that the LA, either now if the property is sold, or at the father's death, might challenge that 100% of the property is the father's asset.
    The obvious reasons the property that is 100% the father's would be put in split names are either to avoid IHT (which the OP states is not applicable based upon size of the estate but would likely fail as GWR) or to avoid future care fees.  It might take some persuasion to convince an LA assessment otherwise.

    In the mean-time, the OP has (technically) been half owner of the asset represented by the property so this would have possibly impacted the OP in terms of SDLT if they purchased other property or their own entitlement to benefits if that situation ever arose.

  • sclare
    sclare Posts: 91 Forumite
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    Yes, you're correct in your understanding @Grumpy_chap. And thanks for your thoughtful response. 

    To be honest I'm still not really sure what the plan was. He'd made a substantial profit on his last first into this field (buying a show home and leasing it back to the builder for three years) and wanted to do it again, and have us benefit as well rather than him pay the CGT on the profit that he'd had to pay the first time. But of course this time the value of the house crashed and still hasn't recovered. So it was all a bit pointless. I suspect he also needed us to get the mortgage, given his age. 

    It's all a mess, frankly, and I regret ever getting involved. But I do want to know where I'm likely to stand when he dies, and whether and when I might be faced with a huge bill or have to evict the tenant of 17 years. 
  • Grumpy_chap
    Grumpy_chap Posts: 16,224 Forumite
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    Thanks OP.

    I think the timeline is therefore:
    • 2003 (or thereabouts), OP's father purchased a BTL.
    • How old was OP's father then?
    • OP's father registered the property half in own name and half in OP's name.  Essentially gifted half the property to OP.
    • OP's father took out a mortgage on the property - joint names with OP.
    • OP's father retains all beneficial interest in the property until death.  All rent to OP's father.  All Expenses met by OP's father.
    • It seems certain that, if part of the reason to gift half the property to the OP was related to IHT, then it would be GWR (gift with reservation) and considered still within OP's father's estate at death.  I note the OP states that IHT is not a concern as the estate is below the threshold where IHT becomes relevant.
    • 2008, OP's father suffered a stroke.  OP's father went into care.
    • 2013, OP's father cleared the mortgage
    • Council are now holding a charge against the property for the ongoing care costs
    The direct question that the OP has asked is whether clearing the mortgage is DoA? 
    I think the answer to that is "no". 
    Clearing debts is usually not considered DoA, plus the liquid asset remains an asset albeit restricted to the property and less available to meet the ongoing care costs.
    It actually makes no difference to the LA as they are holding a charge against the property in lieu of the cash asset that would otherwise be available.

    The question / answer that now needs to be established is whether the LA can keep increasing the charge against the property to 100% value or limited to 50% value on the basis that the other 50% is the OP's and not the OP's father's in any case.
    This is where the comments about IHT may become relevant.  If the gift would fail for IHT purposes (as GWR) and the 100% value of the property within the father's estate at death, then would the same status apply for DoA consideration?  (It is still irrelevant from an IHT perspective if the estate is below IHT threshold either way.)
    There is some logic that the LA may seek to argue with regard to the gift (50% of the property) not being the OP's if the whole property would be assessed as in the father's estate at death.
    Then comes the alternative.  Sell the property in advance of death.  It would also be illogical if a sale now put 50% of the value of the property as the OP's but the same would not hold true at death id considering IHT.

    The thing is, this is all quite complex:
    • Would the assessment of GWR or not ever be completed if the estate at death is less than IHT threshold either way?
    • Rules for IHT and DoA are not aligned in all cases
    I truly do not know the answer on this status of the 50% of the property and whether it is considered as the father's for maximum charge that the LA can apply against the property.
    My comments are really a though process and a question for discussion.
    Hopefully, the OP can find that answer (perhaps from other's on this forum) before needing to discuss the point with a member of the LA staff.  
  • Keep_pedalling
    Keep_pedalling Posts: 18,128 Forumite
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    It is a bit complicated but, clearing the debt is probably not DoA, from what it sounds.

    The simplest things is probably to sell the BTL, or sell whenever it next naturally becomes vacant.

    The thing I can see a LA challenging is whether the property is truly half owned by the OP or 100% owned by the father.  
    From what I read:
    • The father paid for the property and received all the benefit from the property. 
    • The OP has not contributed to the property, nor gained beneficial interest from the property.
    Is that correct?
    I have re-read the OP to see whether I missed anything, but still that seems to be how this was structured - all the father's input and output and the OP was only a joint owner but with no interest in the property.  

    I can see, therefore, that the LA, either now if the property is sold, or at the father's death, might challenge that 100% of the property is the father's asset.
    The obvious reasons the property that is 100% the father's would be put in split names are either to avoid IHT (which the OP states is not applicable based upon size of the estate but would likely fail as GWR) or to avoid future care fees.  It might take some persuasion to convince an LA assessment otherwise.

    In the mean-time, the OP has (technically) been half owner of the asset represented by the property so this would have possibly impacted the OP in terms of SDLT if they purchased other property or their own entitlement to benefits if that situation ever arose.

    A couple of points here. The OP’s father may be the beneficial owner but legal ownership is 50/50. Selling now will loose the rental income and is likely to lead to a CGT liability as neither the OP or their father have ever lived there.

    If things are left as they are, on the OP’s father’s death his estate will consist of a 50% share of the house less funeral cost less debt owed the the LA. If that is insufficient to pay off the debt then the estate will be insolvent and the the LA will only get a portion of the debt repaid.
  • Grumpy_chap
    Grumpy_chap Posts: 16,224 Forumite
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    edited 20 August 2023 at 5:12PM
    Keep_pedalling said:
    A couple of points here. The OP’s father may be the beneficial owner but legal ownership is 50/50. Selling now will loose the rental income and is likely to lead to a CGT liability as neither the OP or their father have ever lived there.

    If things are left as they are, on the OP’s father’s death his estate will consist of a 50% share of the house less funeral cost less debt owed the the LA. If that is insufficient to pay off the debt then the estate will be insolvent and the the LA will only get a portion of the debt repaid.
    Thanks, so the assessment from a contribution to care is different from the assessment for IHT (under which the 50% property gifted would likely be a failed transfer as GWR).
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