Transfer of equity and inheritance dilemma

Foxhouse

Good morning.

My partner  and I (both aged 60) are considering approaching a solicitor (one who has already helped us with other matters) to ask for advice on the following proposals. But before we do that, I thought it might be good to see if anyone else has a similar experience, in order to help our thinking.

In a nutshell, my partner and I live together (unmarried, and no plans to get married). The property is owned solely by her, with a mortgage (in her name only) equivalent to about 30% of the value. In her will, the property is bequeathed to her children, not me, which I am in full agreement with. However, if she dies before me, thanks to the wills we have made, I will be able to live in the property until my death.

The big issue and flaw in this plan though is the mortgage. We both have good incomes, which easily cover our outgoings, but we don’t, and probably will not, have a large enough lump sum to pay it off. And even if we did, my partner also has increasingly serious health issues (but not life threatening) which means that we are currently taking as many holidays, and enjoying days out etc., as we can before it becomes too difficult to do so. It is also probable that we will have to spend on house adaptions which won't be cheap. 

We are considering transferring the property into our joint names, and taking out a lifetime mortgage or equity release, and only paying the interest on it. This will protect me in the event of my partner dying before me, as I very probably won’t be able to raise the lump sum to pay off the mortgage. We both still want the property to eventually be passed on to her children.  

So, here’s the question. Assuming the transfer of equity takes place (in order to nullify the mortgage problem), is there some kind of instrument that can also be set up to protect her childrens’ inheritance? Writing the property in some kind of trust for example, despite there being a mortgage on it? Or any other suggested solutions to the issue?

Thanks

Keep_pedalling

It sounds like her will already contains a clause which will set up an immediate post-death interest trust which gives you the life interest in the property.

The major issue you have, is your reluctance to marry or form a civil partnership,  which complicates things somewhat and depending on the value of the estate could lead to IHT and CGT issues that would not effect your estates if you formalised your partnership. 

How large is the mortgage and how long has it got to run? Any possibility of downsizing to clear or reduce it? 

Foxhouse

Keep_pedalling said:

It sounds like her will already contains a clause which will set up an immediate post-death interest trust which gives you the life interest in the property.

The major issue you have, is your reluctance to marry or form a civil partnership,  which complicates things somewhat and depending on the value of the estate could lead to IHT and CGT issues that would not effect your estates if you formalised your partnership. 

How large is the mortgage and how long has it got to run? Any possibility of downsizing to clear or reduce it? 

Thanks for the response.

The mortgage is not massive, in the greater scheme of things, and it has another 9 years or so to run. 

Yes, we could indeed reduce it but as I said, it's the opportunity cost of using that money to do what we want in terms of holidays, house adaptions etc in the meantime. Added to this is that we wish to visit her son in Aus at some point, and due to her health issues the only practical way to do that would be to go business class, which won't be cheap.

The main issue is protecting her childrens' inheritance. Having said that, we'll give some more thought to the IHT and CGT issues. 

Cheers

MWT

Foxhouse said:

We are considering transferring the property into our joint names, and taking out a lifetime mortgage or equity release, and only paying the interest on it. This will protect me in the event of my partner dying before me, as I very probably won’t be able to raise the lump sum to pay off the mortgage. We both still want the property to eventually be passed on to her children.  

Generally speaking, you cannot get equity release on property that is in a trust, and once you have equity release you would need the lender to approve any attempt to put the property into a trust, and that approval may not be given.

To get equity release that does not force you to leave the property if your partner dies before you would require that both your names are on the deeds and the equity release is then taken in both names.

Perhaps the answer is to transfer only a very small part of the equity to you as Tenants in Common to facilitate the equity release to clear the existing mortgage, then continue with your partners will as it is giving you a lifetime right to remain in the property and then she just needs to trust that you will leave the tiny part of the equity you own to her or her children if she dies before you.

Just be careful with that approach if you decide to include a draw-down reserve in the equity release as should she die before you, the draw-down reserve would be frozen at that time to prevent you from further encumbering the property.

Depending on the value of the property and the rest of her estate, there are potential IHT issues with this plan as well, but that is something else to take advice on...

 

Foxhouse

MWT said:

Foxhouse said:

We are considering transferring the property into our joint names, and taking out a lifetime mortgage or equity release, and only paying the interest on it. This will protect me in the event of my partner dying before me, as I very probably won’t be able to raise the lump sum to pay off the mortgage. We both still want the property to eventually be passed on to her children.  

Generally speaking, you cannot get equity release on property that is in a trust, and once you have equity release you would need the lender to approve any attempt to put the property into a trust, and that approval may not be given.

To get equity release that does not force you to leave the property if your partner dies before you would require that both your names are on the deeds and the equity release is then taken in both names.

Perhaps the answer is to transfer only a very small part of the equity to you as Tenants in Common to facilitate the equity release to clear the existing mortgage, then continue with your partners will as it is giving you a lifetime right to remain in the property and then she just needs to trust that you will leave the tiny part of the equity you own to her or her children if she dies before you.

Just be careful with that approach if you decide to include a draw-down reserve in the equity release as should she die before you, the draw-down reserve would be frozen at that time to prevent you from further encumbering the property.

Depending on the value of the property and the rest of her estate, there are potential IHT issues with this plan as well, but that is something else to take advice on...

 

Thanks for that. Food for thought.