| August 2006
Introduction
This month's Tax Clinic concerns a family home owned jointly by
husband and wife, although the comments below apply equally to civil partners.
The following query does not specifically state that the advice they have
been given is inheritance tax (IHT) advice, but this is assumed to be
the case.
Property in England and Wales may be owned in an individual's sole
name (e.g. husband, wife or civil partner), or as joint tenants, or as
tenants in common (different rules are understood to apply in Scotland,
for example).
What is the difference between the above forms of joint ownership?
On the death of a 'joint tenant', the survivor takes the
entire interest absolutely by operation of law. Therefore it is not possible
to leave an interest in jointly tenanted property to a third party, because
this interest accrues automatically to the surviving joint tenant. It
may be possible to vary this position following the joint tenant's
death, but severance by a 'deed of variation' is outside the
scope of this Tax Clinic.
By contrast, ownership as 'tenants in common' gives each
spouse a separate (typically equal) share of the property, which can be
left by will or disposed of during lifetime. This is frequently found
to be the most satisfactory form of ownership from both an IHT planning
and practical point of view.
Q:
My wife and I are buying a property to live in. We have been told that
we should become tenants in common as opposed to joint owners. Is this
good advice?
A:
Editor's Comments
As the comments below indicate, ownership as tenants in common offers
some flexibility in terms of leaving a share in the family home to someone
other than the surviving spouse on the first death. However, whether any
IHT savings are achievable in doing so will depend on individual circumstances.
And whether it is desirable to give a share of the family home to someone
else in any event needs to be considered very carefully.
If the property is held by husband and wife (or civil partners) as joint
tenants and the parties wish to sever the joint tenancy so that they become
tenants in common instead, a simple form of severance notice should suffice.
This notice should be given during lifetime because a joint tenancy cannot
be severed by will (although a deed of variation can achieve this result).
It is preferable for a severance to be agreed and signed by both parties.
Gifts or legacies between spouses (or civil partners) are generally exempt
from IHT (although this exemption is restricted to £55,000 if the
recipient or survivor is not domiciled in the UK.) If a joint interest
in the family home (or any other asset) is left to the surviving spouse,
the transfer would not normally utilise the IHT 'nil rate band'.
The property interest would be included in the estate of the survivor,
thus increasing his or her estate. This may have implications for IHT
on the second death.
The thinking behind leaving an interest in the home (as tenants in common)
to a non-exempt beneficiary, such as adult children or a family trust,
is that it can often prevent the nil rate band being wasted on the first
death. On the face of it, this seems like a straightforward exercise.
In fact, it can potentially be an extremely complex area of IHT planning
and specific, expert professional advice is therefore essential. The brief
replies below to the forum query are perhaps a good indication of this.
Responses from contributors included:
Lee Young:
If your estates will subject to IHT and you wish to set up IHT efficient
wills then you will probably need to own your new home as beneficial tenants
in common.
mgn1957:
I agree with Lee Young that holding a property as tenants in common is
a pre-requisite to IHT planning but can also be useful if, for example,
the parties have made unequal contributions to the purchase price or have
children from a previous marriage. The advice is neutral - the rationale
behind the advice is all important.
Peter D:
Very good advice. What annoys me is when people use a solicitor, Lawyer
of the BS legal reps they very rarely ask how you want the deeds held.
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