Can Someone Inherit A Mortgage Debt?

[AuntPollyGrey]

A man dies owing £70k on a BTL that is now in negative equity of around £20k. His family home is worth around £150K, Mortgage free, and owned as Tenant in common with his son. The Estate has little cash just enough to pay for a funeral and associated legal costs. His son is sole beneficiary of his father’s Estate.
Does a beneficiary inherit a mortgage debt not associated with his family home?
Would the Son have to sell the family home to finance the BTL mortgage repayment when it becomes due (in around 4 years’ time)
Or is it likely the mortgage Company would cut its losses and repossess the BTL property, auction it off, then write off the remaining debt?
Hypothetical at the moment but need to give someone constructive advice and point them in the right direction for professional advice. Many Thanks.

[Old_Geezer]

No expert but as I understand it, the estate has the debts. If there's not enough to cover them then those owed go without.

[AKMild]

Whilst I am no expert in the matter, a beneficiary does not inherit the liability for the debt. The liability is the estate's. The lender on the BTL property has a claim in the estate for the amount of the mortgage and will probably seek to reduce that claim in the first instance by exercising its rights of sale over that property. It can then claim for any balance from the estate. The estate owns a share of the family home, but not all of it (since the son is a tenant in common and owns the other share), so it would be up to the executors of the estate to sell the house as part of the winding-up of the estate, and pay the BTL lender from those proceeds. The son might be in a position to buy out his late father's share from the executors and if so would be able to keep the family home. The BTL lender, if it is aware of the family home, could seek a charging order from the courts, so that whenever the family home is sold, it will get whatever it is owed. However, whether they would want to spend the money to get such an order for what to them might be quite a small debt is another matter and they might agree to write off the debt.

[aelmpvw]

as old geezer says, the estate has the debts, it wouldn't really work any other way would it?

[AuntPollyGrey]

Would you advise the man to gift his half of the house to his son now .to avoid it becoming part of his Estate on his death, and therefore liable to be liquidated to pay off the BTL mortgage. In this scenario would the house then be repossessed by the Mortgage Company? The man is not concerned about loosing the BTL, just concerned his son would become homeless if the family home had to be sold. The son is single and lives with his father.

[Old_Geezer]

There are time limits on how long one must survive after gifting in order for the gift not to be counted still as part of the estate. I believe authorities have the discretion to extend that period if they believe the reason for gifting was to avoid tax rather than a genuine generous gesture.

[Old_Geezer]

Maybe he could sell his half to the son at the going market rate ?

[ubasses]

On death, all the assets would be added together, the value of BTL property, his share of the joint property and any cash and possessions.
At that point debts have to be repaid, secured debts take priority, and come ahead of funeral costs.
Guessing there would be a shortfall of about £25/£26K after expenses.
Would the son be able to get a Mortgage to repay the Estate?
Another alternative would be for the father to take a Life Insurance Policy to cover the shortfall, you don't say if this is someone planning way ahead, or thinks the position could arise in the near future.
Transfer of the joint property is a solution, but would be considered void if care home fees were needed. Tax would have to be paid if death occurred within 7 years, but this would be tapered, and there could be CGT depending on/when the son wishing to sell.

[AuntPollyGrey]

His son is not in a position to buy, he's still at University. The father is late 50's with no health issues but one never knows when its ones time and he's worrying about this damn BTL. The BTL is paying its way plus a bit extra at the moment with good Tenants who don't want to move. He's tried to sell it but its been valued at £20k less than he owes on the mortgage. Prices may go back up by the time he has to sell to repay the mortgage but its affecting his health as he's worrying about his son.

[Barmaid]

I think he needs professional legal advice.

Problem here is that if he gives away the house to his son, his estate will be insolvent. Then the mortgage lender will be able to obtain an Insolvency Administration Order and may well attempt to claw back the one half share of the property.

If he could get an insurance policy to cover the btl mortgage, that would probably sort things.

[AuntPollyGrey]

Would I point the man in the direction of a Solicitor or a Financial Advisor -or both?

[Old_Geezer]

Both means two bills. My bet would be a solicitor.

[AuntPollyGrey]

Barmaid, when you say claw back one share of the property do you mean the family home or the BTL? If the family home is worth £150k surely they would not want half of it? Would repossessing the BTL not be more appropriate -and perhaps writing off the difference in the sale price and mortgage liability?

[TonyV]

Solicitor will probably be quicker. They sometimes offer a free 30 min consultation.

[Barmaid]

It will be the family home they try and claw back. The Trustee in Bankruptcy may attempt to do this. But the added costs will amount to more than just the amount owing on the mortgage. It all depends on timing though. The lender might just be happy with repossession, but I dont think he can depend on this.

[Barmaid]

Unlikely to get a free half hour in these circs, Tony. In fact that free half hour has pretty much fallen by the wayside now (it used to be under the Legal Aid green form scheme).

[ubasses]

If my rough estimate is correct based on the info given, the Life Insurance for a healthy 50 year old may be the least stressful way to go. He only needs to insure for the shortfall, plus a safety net. If the Mortgage has an end date Fixed Term should make it cheaper. A few quote from a comparison site may be worth a look.

[AuntPollyGrey]

Thanks for all the informative answers so far. If the man died before the mortgage was due to be repaid, is it likely the Mortgage company would allow the Estate to market the property with a view to repaying when they received funds from the sale? If this were the case could the man then calculate a shortfall of say £30K, cover that with life insurance, then the Estate could market the property below value for a cheap quick sale and use the insurance policy as a top up?

[Peter Pedant]

the oracle has spoken - Barmaid that is !
no further advice needed
BUT
\\ Would the Son have to sell the family home to finance the BTL mortgage repayment when it becomes due (in around 4 years’ time)//

is a condition not fulfilled innit?
the father is still alive - and the decade mortality for 50 y o in england is 20%
that is 20% of those hitting 50 dont reach 60

so the father needs the advice about what to do when the mortgage is due [which is likely] - and nothing to do with what does X do when he inherts this and that [which is unlikely to happen[

and it is the standard answer of what do you do when a fixed term mortgage ends and the asset (house) is in negative equity er whatever that answer is

OK poll I have given it to you between the eyes like any peaky blinder should

[Peter Pedant]

I think we all know what is going on around here
the house really is marketable at £30 000 and the mortgage £40k?
well then yes they will offset (find/take)the £10 k lacking from other parts of the estate ....

you cant really be insolvent in the house only but not if you count the fellaz stocks and shares. but you kinda really always knew that

[AuntPollyGrey]

Yes Peter you have opened up another can of worms, what will the father do if he is still alive when the mortgage is due for repayment. Thankfully its not my can of worms . I presume he will try to sell and maybe get a bank loan for the shortfall if the sale does not achieve enough to pay the mortgage off in full. That , thankfully , is not something he asked me about. This is a relative and the less I can be involved the better to be honest, but I did say I knew some nice folks who may be able to point him in the right direction for advice.