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.