Mortgage life protection and unmarried couples

 

Are you an unmarried couple with mortgage protection life cover?  You could be exposed to a potential problem.

Mortgage protection cover is vital to ensure all parties to mortgage debt are protected in the event of the death of another.  However for unmarried couples it is not quite as straightforward as you might imagine.  The problem concerns tax.

For example, if an unmarried couple take out a joint life mortgage protection policy for a property they jointly own.  Should the unforeseeable happen and one partner dies, the other makes a claim on the policy.  When the claim is paid, the surviving partner would receive the full sum assured from the policy, putting them in a position to fully repay the mortgage debt.

But the problem could arise when looking at the estate of the deceased. The probate process requires disclosure of all assets held by the deceased.  This is to ascertain whether there is any inheritance tax to pay.

The value of the deceased’s share of the property will form part of their taxable estate (even though it actually passes to their partner).  Typically, a discount, of between 10% and 15%, will usually be available on the full market value of the property. But another asset which will form part of their taxable estate will be the mortgage protection policy. 

For an unmarried couple; HMRC will count half of the joint life policy sum assured in the estate of the deceased.  This is again, a paper exercise because the reality is the survivor would have already claimed the full sum assured.  The funds from the life assurance policy will never actually enter the estate of the deceased but they could be taxed.

By including half of the sum assured (which could be considerable), within the estate of the deceased, this could increase or even give rise to an inheritance tax charge. 

What’s the solution then?

For unmarried couples, the best solution would be for each partner to take out individual protection cover and these policies would need to be written into trust correctly.  Beneficiaries can be nominated and, for this type of scenario, the beneficiary would be the other partner.

An alternative solution would be to write the individual protection cover on a life of another basis. But this is a lot less flexible.  For example, what would happen if the couple split up or wish to change their beneficiary at some point in the future?

With a trust, beneficiaries can easily be changed if there’s a need to change them. 

So, a good outcome for an unmarried couple would be to make sure that should either of them die during the mortgage term, the other partner is in a position to repay the mortgage debt. But to also make sure we don’t add to, or increase, any possible inheritance tax on the estate of the deceased.

Iceni are independent financial advisors and can set up your protection policy correctly and shop around the whole market to find the right provider for the most competitive price.  Please contact Adrian Nunn today on 07737 521263 to discuss this further or see www.theiceni.co.uk