British Children Can Now Inherit Parent’s Mortgage Debt
Have spiraling house prices and mounting debt problems reached such a critical level in the UK that we can never hope to repay them in our life-time? According to the Kent Reliance Building Society that might be exactly where we are.
The Kent Reliance Building Society has just launched a new mortgage service that allows parent to leave their home mortgage loans to their children to repay. Indeed, the home mortgage loan product being offered by the building society is structured in such a way that you could, conceivably, leave repayment of the principal sum of the home mortgage loan to your grandchildren, or any generation of your family that follows.
All you need to do to ensure that you qualify as a subsequent generation to the home mortgage loan is to prove that you can continue to meet the interest payments on the home mortgage loan. This is because this new and innovative home mortgage loan operates in much the same way as a conventional interest only home mortgage loan, but there is not date in the future when the principal sums needs to be repaid. It is, therefore, entirely possible for you to keep passing down the obligation to repay the home mortgage loan in your will to the next generation to repay.
Although this new home mortgage loan product being offered by Kent Reliance Building Society may, at first glance, seem a rather pitiful reflection of our current housing market prices and debt levels, there may well be practical financial reasons why signing up to this type of home mortgage loan may work in your favour. Not least of these is the fact that it could considerably reduce the amount of inheritance tax your children will need to pay, as they will not be the owners of the house that is being inherited, the building society will be.
As Mike Lazenby of Kent Reliance Building Society demonstrated, anyone who inherits a home worth £400,000, but who has an obligation to repay a mortgage of £150,000 would not be required to pay inheritance tax on the home as inheritance tax doesn’t become an issue unless the amount being inherited is £285,000 or more. On the other hand, if the home had been full paid off, the children would be liable for a tax bill of 40% of the amount over £285,000 – or £46,000
According to the Council of Mortgage Lenders (CML) spokesperson Christopher Dean, this type of home mortgage loan has never been previously offered in the UK. As such, parents and children alike would need to give careful consideration to the benefits of the scheme. For example, would the cost of the interest payments on the home mortgage loan make the scheme worthwhile?
In the end, however, if the children are not happy paying the interest on the home mortgage loan each month, a solution is readily available: sell the property and pay-off the home mortgage loan.
Richard Smith
22nd August 2006
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