IHT and paying off mortgage as guarantor

borkid

Hi my husband is a guarantor for my daughter's mortgage. She is on ESA in support group. He has an ISA maturing and plans to use it to pay off her mortgage. Would this be affected by IHT if he were to die within 7 years as he is in effect paying off his potential debt if she were to default?

DullGreyGuy

What type of guarantor mortgage is it? 

Not an expert but certainly there is more of an argument if it's a joint borrower sole proprietier  than if it's a saving security mortgage or such. 

borkid

I have no idea. She took it out 15+ years ago when she was changing mortgage providers but as she was on beneits then due to chronic illness they said she needed a guarantor. I just thought he would have to pay if she defaulted but the house was in her sole name.

MWT

borkid said:

Would this be affected by IHT if he were to die within 7 years as he is in effect paying off his potential debt if she were to default?

I don't think HMRC are going to care about 'potential debt' only actual debt.

It is going to remain as a potentially exempt transfer under the 7 year rule if he just pays it off.

Either way it is a technical question for an accountant as it really depends on the likelihood of your daughter being able to maintain the payments through the term of the mortgage...

If for example there was no realistic prospect that she would be able to make any payments at all then the lifetime transfer would have been dated from the time he became a guarantor, but as she has not yet defaulted 15 years into the mortgage that is not a tenable argument. 

On the other-hand, if he died before the end of the mortgage term then there is an argument that there could be a deduction from his estate to cover the potential liability, but it is something that would have to be agreed at the time with HMRC. 

Brie

Will his estate have to pay IHT?  So many don't.  But I think that this would be considered a gift as he is effectively giving it to your daughter so IF he has to pay IHT and IF he dies within 7 years then yes I think tax would be due.  

But also if the estate has that high a value does anyone really care that much?

borkid

Brie said:

Will his estate have to pay IHT?  So many don't.  But I think that this would be considered a gift as he is effectively giving it to your daughter so IF he has to pay IHT and IF he dies within 7 years then yes I think tax would be due.  

But also if the estate has that high a value does anyone really care that much?

It shouldn't I just like to consider all possibilites. Thanks for your reply.

Keep_pedalling

It will be a gift and for IHT purposes will stay in his estate for 7 years , however if he does not make the gift it stays in his estate until he dies (unless he spends it of cause). Making gifts does not negatively impact your IHT liability.

silvercar

Regular payments from income are excluded from your estate, so if he paid it off via regular monthly payments over a couple of years it would be less likely to be included in his estate.