What is the difference between 'joint tenants' and 'tenants in common', and what are 'debt' and 'charge' arrangements in the context of the family home?
 Mark McLaughlin
The family home is often the most valuable part of an individual's estate. Conventional inheritance tax (IHT) planning for married couples (or civil partners) is to leave assets in their Wills up to their available 'nil rate band' (i.e. up to £300,000 for 2007/08) to other family members, or possibly to a suitable trust. The reason for this is that legacies between UK domiciled spouses (or civil partners) are subject to a 'spouse exemption' for IHT purposes. By leaving everything to the surviving spouse, the nil rate band is wasted on the first death, and the estate of the surviving spouse (and the potential IHT bill for their estate) is increased accordingly. Leaving an amount up to the nil rate band to a non-exempt beneficiary can save IHT of up to £120,000 at 2007/08 rates (i.e. £300,000 x 40%) on the first death. However, many individuals do not have sufficient assets to make up the nil rate band sum without taking into account their interest in the family home. Giving away an interest in the family home to someone other than the surviving spouse can be problematic for a number of reasons. Arrangements have therefore evolved to ensure that the deceased's interest in the family home passes to the surviving spouse, whilst still ensuring that the deceased's nil rate band is used as far as possible. These arrangements are known as 'debt' or 'charge' schemes, and are the subject of the following Tax Clinic query (from 'DavidHC'). Query from TaxationWeb visitor ('DavidHC')If a couple hold a property as tenants in common, I understand that, on first death, the deceased's half can be left to the survivor in exchange for a debt owed to a discretionary trust (thus negating the value from the survivors estate). I have read recently that: a) a charge rather than a debt is more effective.
b) that it is more robust (to challenge) if, instead of the debt/charge being owed by the individual, the debt/charge is owed by an IIP Trust that holds the property. [In the case of the IIP trust CGT is not applicable as the tenant gains exeption, and its value is cancelled out by the debt owed to the discretionary trust] I do not understand why (if correct) these points have been suggested and would be interested in anyone's comments. Editor’s CommentsIt may be helpful to explain that property can be owned as 'joint tenants' or 'tenants in common'. These are legal terms. The difference is potentially important in the context of IHT planning. If husband and wife (or civil partners) own property as joint tenants, on the death of the first spouse, their interest passes automatically to the survivor, irrespective of whether the deceased's property interest is left to someone else in their Will. By 'severing' the joint tenancy and owning the property as 'tenants in common' instead, it is possible for the deceased to leave their property interest to other family members, or to a trust. This can, in appropriate circumstances, help to ensure that the IHT 'nil rate band' sum is not wasted as the result of everything being left to the survivor. There are a number of reasons (tax and otherwise) why it might not be desirable for the deceased to leave their property interest to a trust, or even to a family member. The 'debt' or 'charge' schemes broadly involve the deceased's property interest passing to the surviving spouse or civil partner, in exchange for an IOU or a legal charge over the property. This type of arrangement has both tax and legal implications. They should not be undertaken lightly, or without specific professional advice. For example, there are tax anti-avoidance provisions to overcome (see Bob Frasers comments below), and the arrangements could cause added complications if the surviving spouse ever decided to move house. We always recommend specific professional advice, but perhaps never more so than in the case of debt or charge arrangements. Bob Fraser's posting below refers to additional sources of information in this area. Forum responses included those reproduced below.'Peter D' commented:I assume you are talking about a nil rate band (NRB) Discretionary Trust. A charge is usually held against a property not an estate. The Disrectionary Trust wills should have an inherent Deed of Trust which divided the entire estate equally on first death and places up to the NRB, if available from the 1/2 into the trust, it is not the property it is a value and this is loaned back to the estate by a simple IOU/debt. Then on second death the estate is revalued and the the values form the trust deducted before any CGT calculation. If you care to email me I will send you an article on this that I wrote last year. Is is 3 pages so not suitable for the Forum.
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Bob Fraser commented:The issue surrounds the recent Phizackerley case in which the Special Commissioner rejected an appeal against the HMRC's determination that the debt scheme implemented as a result of the terms of Mrs P's Will fell foul of section 103 FA 86. The view of some practitioners in this field (James Kessler QC for one), is that the "charge scheme) is a more appropriate option in some cases. See the excellent articles on this website (search for id=167 and id=313). There is also in this Quarter's issue of Trust Quarterly Review (Vol 5 Issue 2 2007, pages 31-33) for those who subscribe. This mentions the view that HMRC accept that implementation of the charge scheme will not give rise to SDLT, because the charge is imposed by the executor rather than incurred by the spouse) This is definately an area for specialist trust advisors. 'Geoff D' commented:An IIP trust is preferable should a debt scheme be entered into as it avoids the problems noted by Bob above as it is the Executors who enter the IOU rather than the survivor. -------------------------------------------------------------------------------- To view this discussion online (including any possible updates), go to:
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