Remortgaging After Inheriting a Property

What Happens to a Mortgage When Someone Dies?

If the person who passed away had a mortgage on the property, that debt does not simply disappear. The mortgage becomes the responsibility of the estate, and the executor or administrator must deal with it as part of the probate process.

In many cases, the deceased will have had a life insurance policy or mortgage protection policy that pays off the outstanding mortgage. If so, the property passes to the beneficiary mortgage-free. If there is no insurance cover, the mortgage balance must be repaid from the estate or by the person inheriting the property.

Lenders are required to treat bereaved borrowers sympathetically. The FCA's rules give executors and beneficiaries reasonable time to resolve the situation, whether that means selling the property, remortgaging, or making other arrangements to repay the debt.

Remortgaging an Inherited Property

If you inherit a property with an existing mortgage and want to keep it, you will typically need to remortgage into your own name. The existing lender may agree to transfer the mortgage to you, but they will carry out a full affordability assessment based on your income and circumstances.

If the property is inherited mortgage-free, you can take out a new mortgage against it to release funds. This might be necessary to pay inheritance tax, buy out other beneficiaries, or fund repairs and renovations needed to make the property habitable or rentable.

Before you can remortgage, the property must be legally transferred into your name. This happens through the probate process and is handled by the executor or administrator of the estate. The Land Registry records are updated once a grant of probate has been obtained and the assent or transfer documents have been completed.

Tax Implications to Be Aware Of

Inheritance tax (IHT) may be payable on the estate if its total value exceeds the nil-rate band, which is currently £325,000. There is an additional £175,000 residence nil-rate band if the property is passed to direct descendants such as children or grandchildren. A married couple can combine their allowances, giving a potential threshold of up to £1,000,000 before IHT applies.

If IHT is due, it must normally be paid within six months of the death. For property, HMRC allows payment in annual instalments over ten years, but interest is charged on the outstanding balance. Remortgaging the property can provide the funds to pay the IHT bill in full and avoid accumulating interest.

Capital gains tax (CGT) is another consideration if you later sell the inherited property. The base value for CGT purposes is the property's market value at the date of death, not the original purchase price. If the property increases in value between the date of death and the date you sell, you may be liable for CGT on the gain, unless it is your main residence.

Buying Out Co-Inheritors

If you have inherited the property jointly with siblings or other family members, you may want to buy out their shares so you can keep the property. This involves remortgaging to raise enough funds to pay each co-inheritor their portion of the property's value.

For example, if a property worth £400,000 is inherited equally by three siblings and one wants to keep it, they would need to raise £266,667 to buy out the other two siblings' shares. The lender will assess whether this amount is affordable based on the buyer's income.

It is important to agree on the property's value. Getting an independent valuation can help avoid disputes. You may also want to formalise the arrangement through a deed of variation or a family agreement drawn up by a solicitor to ensure everyone's interests are protected.