Buy to let mortgage to clear an inheritance tax bill

Last week, we received an enquiry from a broker who needed guidance on how he could help a client get a buy to let mortgage to clear an inheritance tax bill worth £430k. Due to the severity of the circumstances and the upcoming PRA changes, we feel that it is important that we share this case with you.

We would urge you to take the time to contact landlords now to make them aware of how the PRA changes will affect them and offer to remortgage their buy to lets now if affordability could pose an issue.

Case Overview

A female client contacted a Mortgage Broker following the death of her partner. The lady was not married and had recently inherited four buy to let properties which were previously solely in her partner’s name.  The properties were unencumbered and in total worth £1.4m.

Due to the client and her deceased partner being unmarried, the client had received an inheritance tax bill to the value of £430k. The maximum an unmarried client can inherit before inheritance tax at 40% kicks in is £325k. The client now needed to mortgage the properties into her own name to raise funds to clear the tax bill but was struggling to find a lender who would help her because she has earned no income from an employed role and many lenders will not lend to pay a tax bill.

We are currently working with the broker and the client to remortgage the properties. Due to the buy to lets generating a gross rental income of £5600 per month, we feel confident that we can secure mortgages on the properties with a specialist buy to let lender. If this case was presented to us after the PRA changes on the 30^th September, then unfortunately we would be unable to assist the client.

Why Following the PRA Changes We Would Be Unable to Help?

From 30^th September 2017, landlords with four or more mortgaged buy to let properties will be classed as portfolio landlords. Under the PRA’s new requirements, landlords will face much tougher affordability checks and request detailed supporting information; such as business plans, cash flow forecasts, bank statements, SA302s, tax returns, income and expenditure etc. As this client’s partner owned and managed the four properties and she can show no experience in this field, she would be unable to secure funding and therefore would be forced to sell the properties to clear the inheritance tax bill.

How Could This Have Been Prevented?

As the old saying goes, prevention is better than cure. If the client’s deceased partner had taken out life insurance, costing just £43.26 per month, then this would have covered the full inheritance tax bill. The buy to let mortgage on the properties will now cost the client £1505 per month – this is a huge difference!

We cannot stress enough the importance of explaining the need for protection to every client. Most people work hard to provide for their loved ones now and in the future. We need to ensure that they have the right protection in place to ensure this happens.