Offset mortgage, parent's funds and inheritance

muchembe

My father in his 80s recently downsized and moved to live near us. He has offered to use some of his released capital to pay off our mortgage. I have some concerns i) he may need the funds himself, for example for care expenses, a new kitchen or whatever to enjoy his life in this fine city ii) we would need liquidity to pay inheritance tax if he were to die within seven years, iii) we also want to make sure my sister benefits fairly
It seems to me that an offset mortgage is a great alternative solution here. We have about 100K outstanding, with 8 years on the current mortgage and about 36% LTV. If he were to 100% offset that with 100K in a linked account then i) the funds would remain fully available to him as and when needed, ii) ditto for inheritance tax, iii) we could continue to pay the same monthly fee as now, with him withdrawing the same amount from the linked account back into an interest bearing account. Funds remain available to benefit my sister both during my father's lifetime and from any inheritance he leaves to us.
It all looks such a no-brainer but searching finds very little reference to this kind of scenario online, so maybe there are obvious downsides I am missing?

user1977

One obvious downside is whether such a product even exists? Do you mean your mortgage remains in your name but is linked to a savings account in his name?

Deedoodee

-Your father would lose the interest on his savings so it’s costing him money
-offset products have higher interest rates. If he needs to withdraw a large chunk of money, you’ll be left paying a higher rate. 

Keep_pedalling

One alternative would be for him to give you an interest free loan to pay off your mortgage and protect it (and your sister’s inheritance) with a charge on your house. 

Does he still own a home or is he now in rental accommodation?

Is inheritance tax actually an issue? It would seem unlikely if gifting £100k would leave him short of funds for house maintenance or care costs. His estate will have IHT exemptions of £500k if the house he just sold went for over £175k and it could be double that if he is a widower.

muchembe

user1977 said:

One obvious downside is whether such a product even exists? Do you mean your mortgage remains in your name but is linked to a savings account in his name?

They do seem to exist, though such 'family offset' mortgages often seem pitched at first time buyers getting help from the bank of mum & dad. There is a nice explainer video on the Yorkshire Building Soc website which says the YBS version lets you have several savings accounts linked to the mortgage, including some that belong to other family members  (sorry, just registered so can't post links yet it seems)

muchembe

Deedoodee said:

-Your father would lose the interest on his savings so it’s costing him money
-offset products have higher interest rates. If he needs to withdraw a large chunk of money, you’ll be left paying a higher rate. 

That's a good point. I guess saving returns are not as high as mortgage rates so we could in principle pay him more than the rate he could get elsewhere and still be better off. That could mean he had to declare the interest payments as income though. I'm already a bit worried that the foregone interest would count as a gift that is liable for inheritance tax.

Yes, also true that we'd be left with the higher rate in  the scenario you describe. We'd hope to have saved enough in the interim for it to be worthwhile and/or that we can switch to another product at reasonable cost.

muchembe

Keep_pedalling said:

One alternative would be for him to give you an interest free loan to pay off your mortgage and protect it (and your sister’s inheritance) with a charge on your house. 

Does he still own a home or is he now in rental accommodation?

Is inheritance tax actually an issue? It would seem unlikely if gifting £100k would leave him short of funds for house maintenance or care costs. His estate will have IHT exemptions of £500k if the house he just sold went for over £175k and it could be double that if he is a widower.

Thanks, that loan idea is something to look into but on first sight it doesn't seem to offer the same instant access to his funds as needed. He has purchased a bungalow and the estate would be over £500k, so I think inheritance tax would be relevant. In many ways I'd rather leave him with his downsizing funds buffer fully available and keep our next mortgage fixie or tracker entirely separate. But he is keen to help and it is true that either paying off our mortgage or doing an offset would keep ££ of money in the family that would otherwise be lost to interest payments.

(BTW I'm new to posting here so not sure if it is good etiquette to post multiple individual responses like this. If not, apologies and I won't feel offended if anyone want's to set me straight)

Keep_pedalling

muchembe said:

Keep_pedalling said:

One alternative would be for him to give you an interest free loan to pay off your mortgage and protect it (and your sister’s inheritance) with a charge on your house. 

Does he still own a home or is he now in rental accommodation?

Is inheritance tax actually an issue? It would seem unlikely if gifting £100k would leave him short of funds for house maintenance or care costs. His estate will have IHT exemptions of £500k if the house he just sold went for over £175k and it could be double that if he is a widower.

Thanks, that loan idea is something to look into but on first sight it doesn't seem to offer the same instant access to his funds as needed. He has purchased a bungalow and the estate would be over £500k, so I think inheritance tax would be relevant. In many ways I'd rather leave him with his downsizing funds buffer fully available and keep our next mortgage fixie or tracker entirely separate. But he is keen to help and it is true that either paying off our mortgage or doing an offset would keep ££ of money in the family that would otherwise be lost to interest payments.

(BTW I'm new to posting here so not sure if it is good etiquette to post multiple individual responses like this. If not, apologies and I won't feel offended if anyone want's to set me straight)

No apology needed and nothing to set you straight on.

You clearly have his best interests at heart so maybe a half way house solution would be good for him to consider. If he ever needs residential care then he has his bungalow to fall back on so really he needs to keep enough savings back as an emergency fund and for a little bit for some self indulgence. He is obviously keen to help out financially, and as someone who has done the same for our children I know that gifting in your own lifetime can give people a great deal of pleasure and satisfaction so you should not totally discourage it. 

If instead of gifting you £100k he could gift half that but split between you and your sister to even things up. This could also potentially reduce any IHT under the 7 year rule. If his income exceeds his expenditure then he could also gift that excess income to prevent is estate building up again as these sort of gifts are exempt from IHT.

muchembe

Thanks Keep_pedalling, that sounds like good advice.