My children are at University with large student debts. They have just lost their father suddenly and unexpectedly. He left no will, so they will inherit, but my eldest has not yet obtained probate. Their father had a heavily mortgaged property which will be sold, leaving a small amount of equity. Will/do they qualify as first time buyers under the Lifetime ISA scheme?
When someone dies, their assets and debts immediately become part of their estate, which has a separate legal personality to the beneficiaries of the estate.
The estate can sell the house first, repaying the mortgage in the process, and then the residual funds can be distributed to the beneficiaries without them ever actually owning the house. In fact given the mortgage, this is likely to be the only option: the lender is unlikely to accept the house+mortgage being passed on directly to students who probably can't afford the repayments.