Life interest in property and mortgage

Clients would like to make a will leaving their equitable half share in property to life interest trust for the survivor on their death. The residue to pass to survivor.

In this instance, the property remains mortgaged for about one half of its value. The clients simply have this property. There are virtually no other savings.

I am unsure as to the mechanics in terms of the mortgage and how the will needs to be drafted as a result. My usual precedent states that :-

“the Trust Fund” shall mean my share of my property whether leasehold or freehold which I own at the date of my death and known as XXXXX subject to and charged with all principal sums and interest secured thereon by way of my share of the mortgage or otherwise…

This means that the trust comprises one half of the equitable share (which increases in value post death as the value of the property increases).

However, what element of the mortgage does the trust bear? Is it 50%? If the survivor had the funds to discharge some or all of the mortgage at the time of the death (say from spouse’s death in service), can they decide whether they want to use it to deduct it from their own half or from the half held in trust?

Please would you let me know your thoughts.

It is worth noting in cases like this that the couple will be liable jointly and severally for the full amount of the mortgage debt. Although the mortgage is charged against the property as security, it is important not to lose sight of the fact the deceased (and the deceased’s estate) is potentially liable to repay the whole (not just one half) of the amount due - as is the surviving spouse.

If the surviving spouse discharges the mortgage e.g. from other funds available to him it would be reasonable for him to expect this repayment to be set against the debt owed on his own share of the property (and there are family law cases that broadly endorse this principle). If he discharged more than ‘his’ share than it would be reasonable for him to expect a larger share of the property as a whole as a consequence (again, based on family law cases that broadly support that result). That could be (and would be better if) the subject of an agreement with the trustees of the life interest trust. There may however be some SDLT to pay on acquisition of an increased share of the property.

All these complications are happily skipped over at the point of will drafting and are left to be thrashed out at the point of the estate administration.

Paul Davies
Clarke Willmott