In this series, we’re exploring the hidden value of mortgage advice.
Often, when people think about the benefits of a mortgage advisor, the cliched norms of being whole of the market, having insider knowledge and getting the best deals are what spring to mind.
We like to think about getting a little off the rate, some lower arrangement fees or being guided on the pitfalls of certain products. But what about the transaction itself as a whole?
The real value of advice could be much more significant, like hundreds of thousands of pounds more.
We can all be a bit rate-obsessed and inclined to focus on the most apparent numbers, but the biggest risks to consumers are often those least apparent.
Most customers might only have one transaction in a lifetime where their choices may have such extreme consequences, but would you know enough to see those pitfalls when they exist?
Recently, I spoke to clients intending to buy a property in a sole name, as unmarried partners. And the potential impacts of that decision troubled me.
Like many customers, as his spouse had recently ceased employment, he thought it best to apply in sole name. Whether for simplicity’s sake or because he assumed it had to be a sole application.
Many people think that without an income, you cannot be an applicant; in truth, it would limit the maximum loan a little, but for most people, it is unlikely to jeopardise their application.
Anyway, that’s what a mortgage advisor is for, to advise, even if that means discussing two scenarios.
But this decision could have far-reaching consequences outside of mortgage lending, so I would immediately advise them to get tax, inheritance planning, and legal advice about other ramifications.
So what difference would it have made applying in sole names, and could it go monumentally wrong?
Now, we are not tax specialists, but my understanding of the tax position on this application would be as follows:
If you are neither married nor civil partners, you don’t benefit from joint inheritance tax thresholds totalling £650k, and you also lose the joint-main residence allowance totalling £1 million.
You can’t have joint ownership without a joint mortgage, and there is no such thing as a “common law” marriage outside of divorce settlements.
It’s fair to assume that tax allowances and property values will increase over time. But based on the purchase price of £600k and today’s tax allowances, we get an analogue of how future costs might stack up.
Whether or not they have a valid will, they may only use the applicant’s IHT allowance to pass the property onto children. As his partner never went onto the ownership of the property, her £325k allowance would effectively go unused if she died first.
In todays money, that would mean £110k of inheritance tax being liable by their children on death. However, if the applicant died first, leaving the whole property to his partner in his will, they could use both their allowances in series, but the two don’t combine in the way a married couple’s would; this could lead to paying even more inheritance tax.
So, a £110k payment would still be required, and that could force his partner to raise a lifetime mortgage or similar finance to pay the bill.
When she left the property to her children, the whole asset would be chargeable again, potentially leading to over £200k in inheritance tax plus any costs for financing the initial tax burden.
If they had arranged a suitable will, they could have avoided some of the tax by leaving half of the property value to the children and half to the partner, but ultimately still liable for the £110k.
That could also have its pitfalls to if the applicant died whilst the children were still minors (as raising any loan to pay the tax burden with a property co-owned by children is unlikely, if even possible).
If they had entered a joint mortgage, they could have split ownership 50/50 and used both of their £325k allowances to pass the property onto children with no IHT at all in today’s money.
Similarly, a civil partnership for tax purposes would allow larger benefits. That is relevant as it’s likely that this type of affluent customer ends up with further savings that may also pass to children, and could bear even more tax.
If they had arranged the mortgage in a sole name and had not made a valid will (its estimated that roughly 60% of people die without one), the consequences could be more dire.
If the applicant died first without a valid will, the ‘laws of intestacy’ would leave the property entirely to the children.
I am sure you can imagine that as the children would own the property (and if still minors, it would need to go into a legal trust to be held for them until they were 18), this scenario with a looming tax bill of £110k and a property you don’t technically own, would be about as much fun as DIY dentistry and something no one sane would even consider leaving as a possible pitfall.
There could be some benefits to keeping ownership in a sole name if the customers were likely to invest in other properties later, but this wasn’t the case at the time; either way, they would benefit from having been advised by a tax specialist so they could understand the options, and by a legal advisor so they would know the implications too.
One of those would also be that the partner was effectively gifting her deposit to the applicant and would likely need to sign various affidavits relinquishing her right to those funds, and residing in the property, potentially problematic in an acrimonious separation.
That all shows that arranging a mortgage can have wide-reaching technical consequences and huge financial impact, so if you’re working with a good adviser, you are much more likely to avoid catastrophe than if self-advising.
Whilst we aren’t tax or legal specialists, at least having someone with a moderate knowledge of the area is likely to catch situations that have huge risks attached and guide you to take further advice on those decisions that might be questionable.