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The value of mortgage advice – An unmarried couple with children making an application in a sole name

In this series we’re exploring the hidden value of mortgage advice.

Most of the time when people think about why to use an advisor the slightly cliched norms of being whole of market, inside knowledge and getting the best deals is what springs to mind.

We like to think about getting a little bit 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 greater, like hundreds of thousands of pounds greater.

We can all be a bit rate obsessed and inclined to focus on the numbers that are most apparent, but the biggest risks to the consumer are often those they haven’t thought about.

Most customers might only have one transaction in a lifetime where they could make such a monumental bad decision, but would you know enough to see those pitfalls when they exist?

This week a client who had previously taken recommendations as an unmarried couple came back to me to refresh those recommendations, and this time had decided to apply in sole name only.

Like many customers, as his spouse had recently ceased working he thought it would be best to apply in sole name. Whether for simplicities sake or because he thought it had to be sole.

Many people think that without an income you cannot be an applicant, it would limit the maximum loan a little but for most people might not be detrimental and an adviser can always make a recommendation showing options both sole and joint.

But this decision could have far reaching consequences and I would immediately advise them to get tax/inheritance planning advice and legal advice about other implications.

So what difference would it have made applying in sole names, and how 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 not married or civil partners, you don’t benefit from the joint inheritance tax thresholds totalling £650k and you also do not benefit from joint main residence allowance totalling £1 million. You can’t have joint ownership without a joint mortgage, and there is no such thing as “common law” marriage outside of divorce settlements.

It’s fair to assume that tax allowances and property values will increase in future, but if we look at numbers based on the purchase price of £600k and todays tax allowances it gives a sort of analogue for how these might compare in future.

Whether or not they have a valid will, this means they will only be able to use the applicants IHT allowance to pass the property onto children in the future. 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 paying £110k in inheritance tax when the property was left to children. However, if the applicant died first, and left the whole property to his partner in the will they could use both allowances in series, but as they don’t combine in the way a married-couples 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 then left the property to her children the whole asset would be chargeable again. Potentially leading to a total of 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 something like half of the property value to the children and half to the partner, but ultimately would still be looking at paying the £110k.

That could also have its own pitfalls though if the applicant died whilst the children were still minors as raising any kind of loan to pay the tax burden with a property co owned by children is not likely to be easy if even possible at all.

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 even larger benefits. This is relevant as it’s quite likely that this type of affluent customer ends up with larger savings sums that may be passed onto children as well and could bear even more tax.

If they had arranged the mortgage in a sole name and had not made a valid will (it’s estimated that something like 60% of people die without a valid will) then the consequences could be even 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 they were still minors it would need to go into a legal trust to be held for them until they were 18 that this scenario with a looming tax bill of £110k and a property you don’t technically own or could mortgage, 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 and 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 to reside in the property, something that could be very problematic in an acrimonious separation.

This all goes to show that arranging a mortgage can have wide reaching technical consequences that can have huge impacts financially and emotionally, and so if your working with a good adviser whose looking for these things you are much more likely to avoid them than you are 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 those situations that have huge potential outcomes and guide you to take further advice on those decisions that might be questionable.

Mortgage Broker Q&A – Why is a life insurance policy written into trust?

Question; I have been advised that my life insurance policy should be written into a trust, why is this?

There are several reasons why certain life insurance or assurance policies should be written into trust and generally they are to do with avoiding tax liabilities and or ensuring that the proceeds of a policy will reach the intended recipient.

About two thirds of people in the UK don’t have a valid will and testament and die “intestate” which is the term for an estate which does not have a valid will in place to determine where and how the estate proceeds will be divided up (sometimes there is a will in place which is no longer accurate and can be invalid for this reason too).

In this case there are rules which govern how the estate is split which can often leave the proceeds of a life policy being paid out to someone who is not the intended recipient.

A good example is a couple who are unmarried and have arranged a life policy on the life of the main breadwinner to repay the mortgage in the event of death, in this case if there were no valid will in place the proceeds of the policy would likely be passed on to the deceased’s family rather than the surviving partner which could include children from a previous marriage or the deceased’s parents for example.

In another scenario a life policy which was written to pay out to a couple’s children on the last survivors death in order to cover inheritance tax liabilities would itself become part of the deceased’s estate, and therefore liable to inheritance tax itself if it were not written into trust.

The rules around taxation and particularly the taxation of trusts change regularly and this is one of the reasons why mortgage advisors will recommend a regular review of your circumstances. A policy once written into trust may well one day be better off outside of it and therefore it’s important to regularly check that existing provisions are still arranged in the most tax efficient and sensible manner possible.

If you have a life insurance policy which you think may need to be placed into trust or to speak further to a mortgage advisor call 0845 4594490 for independent advice.

Mortgage Broker Q&A – Capital Gains Tax on Buy to Let or investment properties

Capital gains tax is levied on gains made on certain non exempt sales of assets at a current rate of 18%. Your main residence is effectively exempt from Capital Gains Tax through tax relief, however any second home or investment property will become liable for Capital Gains Tax from the date at which it is no longer your main home.

So if you bought a property as a second home or buy to let then it is liable from the date of purchase, whereas if you bought a property as your main home and subsequently moved to a new property letting the old one, then the old property becomes liable to Capital Gains Tax from the date of transfer however there is a 36 Month leeway given so effectively you owe Capital Gains tax on the property from 36 Months after its transfer to a buy to let.

Losses and expenses can be set off against any gain, so keep a record of all your costs as a landlord including maintenance bills etc but not including your mortgage costs (mortgage interest is offset against income tax). This means it is also worth having some form of valuation on the property at or around its 36 month as a let property to establish the value of the asset at its date of becoming liable.

You also have a personal Capital Gains Tax threshold of £10,100 currently below which no tax is due, so if you are married or in a civil partnership having the property held on a joint tenancy or tenancy in common basis will allow you to use both your tax thresholds up to £20,200. To work out any tax owed take the sale value of the asset, less any costs and applicable tax threshold and the value at its date of becoming liable the multiply by 18%.

So if you let a property worth £120K in 2005 and sold it this year for £150K with costs in the four years of £3k then you would owe £30K less £3K, less £10,100 which = £16,900 taxable gain then multiply £16,9K by 18% giving tax due of £3,042. In the same situation for a married couple where the property was held in joint names you would instead take the gain of £30K less £3K costs, and £20,200 tax exemption giving £4,800 taxable and tax owed of £864.

Capital Gains Tax is a complex area and there are other factors which may affect your tax liability, and it should be remembered that taxation policy can change in each government budget. For more information or to speak to a mortgage broker call 08454594490. Seek independent taxation advice for an exact analysis of your tax liability and guidance on tax mitigation.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT. YOU DO NOT HAVE TO PAY A FEE FOR OUR SERVICES AS WE RECEIVE COMMISSION FROM LENDERS. SOME BUY TO LET AND COMMERCIAL LOANS ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY
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