Children to inherit home and debt

A new type of mortgage that would allow parents to pass their property and debt on to their children was launched today by the Kent Reliance building society.

Deputy chief executive Rob Proctor said the "intergenerational" mortgage was a concept that could be applied to any of the building society's mortgages.

It means that a homeowner can take out any interest-only mortgage with the building society and pass the mortgage debt and interest repayments, along with the house, to their children when they die.

Most mortgages come with a term of around 25 years, but the intergenerational mortgage has no fixed time limit. The beneficiary would only continue to repay the mortgage, and would still owe the capital.

If the beneficiary could not meet the interest repayments on the mortgage, or did not want to keep the property, they would have to sell it to repay the outstanding capital.

The lender claimed the scheme could help cut the amount paid in inheritance tax, which is charged at 40% on the value of estates over the £285,000 threshold.

Chief executive Mike Lazenby said that under the intergenerational mortgage a child inheriting a £400,000 home and a £150,000 mortgage would not pay inheritance tax because the value of the estate passed on was only £250,000, and below the inheritance tax threshold.

If the full value of the house were passed on, there would be a tax bill of £46,000, or 40% of the value of the house over £285,000.

"We wrote to all our customers who have interest-only mortgages to remind them they have to decide what they want to do," said Mr Lazenby. "The intergenerational mortgage is one of the options. They can keep it on interest-only and when they die they pass on the property and the mortgage to their kids."

Ray Boulger, senior technical manager at mortgage adviser John Charcol, said the option was unlikely to be taken up by many people.

"Most people want to pay off their mortgage before they retire," he said. "Keeping a mortgage into retirement leaves you financially restricted."

He added that anyone thinking of using the intergenerational mortgage as an inheritance tax-saving device should seek professional tax advice.

The Council of Mortgage Lenders (CML) said the mortgage gave homeowners more choice, but warned that children inheriting a mortgage needed to be aware of its financial implications.

"We have not seen this sort of mortgage in the UK before," said CML spokesman Christopher Dean. "These types of products are quite popular in Switzerland, Japan and Ireland.

"It gives consumers more choice. It might be an advantage to people on a low wage entering home ownership, where their mortgage may take longer to pay off. It means parents can pay off some of the mortgage and leave some to the children."