Property

Property: The Real Thing

Most people do not pay inheritance tax; their total assets are below the IHT threshold (£325,000). And many people do pay IHT for a single reason: the value of their homes.

Property is important for tax reasons.

It is also important as a potential source of family disputes: after a homeowner dies, survivors may quarrel over who owns what and when it should be sold. It may be necessary to sell the family home to raise the cash to pay the IHT bill. Often, the sale of a home in such circumstances means that a survivor (usually the romantic partner of the deceased) may have to find a new home. However, good advance planning can ease the personal and familial and well as economic burdens.

 

Joint Tenancy versus Tenants in Common

A house owned by two people can be co-owned as a 'joint tenancy' or as 'tenants in common.' (The word 'tenant' or 'tenancy' in this context has nothing to do with landlords and tenants, or with rent.)

Joint tenants own the whole property jointly such that if one dies, the whole property is then owned by the other person. Neither owner has a share of the property that can be passed on to someone else in a will. Joe and Jane are beneficial joint owners of their home. If Joe dies first, Jane becomes sole owner. If Jane dies first, Joe gets the home. Even if one or both of them has willed their half of the property to someone else, that part of the will is invalid. The joint tenancy prevails over the will.

Tenancy in common involves two people owning a specific share of the property, 50-50, 99-1or something in between. Each co-owner can dispose of their share in their will.

If you want to leave your share in a property to someone, you need a tenancy in common.

Ownership can be tricky, even if legal documents seem to seal it in writing. Recent (2011) court cases will probably allow some cohabitants to claim at least part ownership even if their names do not appear on the ownership documents.

Geoff Boycott, the broadcaster and former cricketer, bought a house jointly with his then girlfriend in 1996. Years later, she changed the form of ownership, and his failure to grasp the implications of the change led to a costly and bitter court case. See Property Ownership for more information on this case and other new developments.

How is your property owned?

The way to find out if a property is jointly owned or a tenancy in common is to consult the title documents at the Land Registry.

Changing the ownership arrangement

A joint tenancy can be changed into a tenancy in common by giving written notice to the other owner.

Converting a tenancy in common to a joint tenancy is more complicated and generally requires a solicitor.

Give it away: sounds logical, might be lethal

If you want to remove your property from your assets, think twice about giving it away - or how and when you do so.

The seven-year rule applies to houses as to other gifts: If you give your house to, say, one of your children and you live for more than seven years, the value of the house drops out of your estate. If you do not survive for seven years, it remains among your assets (although the longer you live during that seven-year period), the less of it you own technically.

If you give your house to someone else but continue to live in it, you may really not have given it away in the eyes of the tax inspector.

Very fancy, very dicey

Parents and children can combine in various ways to sell one or more family homes, buy other properties, and share occupancy. There are plenty of fancy financial options.

But beware of robbing Peter only to pay Paul. Some property transactions will attract the attention of the tax man, who will want to see if a gift has been made with reservation of benefit, or it market rent is being paid. On a strictly financial basis, you may arrange a deal that - depending on the ownership or rental arrangement - enables you to avoid inheritance tax only to incur income tax. If you sell a second home or an investment property, you have capital gains tax to consider.

Real v Other Property and Joint Ownership

Assets such as savings accounts can be owned jointly. As with home ownership, the other owner automatically obtains the share of the deceased.

Inheritance tax and co-ownership

In a joint tenancy, if a husband, wife or civil partner dies, their other half - the 'surviving spouse' - inherits the share free of inheritance tax.

In a joint tenancy, if the joint owners are not spouses or civil partners, IHT rules apply, whether the relationship is familial (parent and child, brother and sister, brother and brother, sister and sister, for example) or not (two friends, for instance).

In a tenancy in common, the share belonging to the deceased is distributed according to the will or, if no will, by the rules of intestacy. As part of the estate, it might be subject to IHT.

Second Homes

Giving a property to someone else - whether it is your first, second or tenth home - is subject to the seven-year rule. Survive for seven years after making the gift and your goal of eliminating it from your estate has been achieved.

But it must really be a gift in the sense that you no longer occupy it in any genuinely residential manner, either as a first or second home. In other words, if you give it to a son or daughter and have the occasional sleepover visit or brief holiday there, that will satisfy the taxman. But if you stay for prolonged periods of time, the tax man may regard it as a gift with reservation.

If you have two or more homes and are making decisions about IHT, you should also consider changing your Principle Private Residence to reduce capital gains tax.

Rule of Survivorship

In a joint tenancy, the owners have equal shares. When a co-owner dies, the survivor inherits the other owner's share - this is the 'rule of survivorship'. It is possible to "disapply" a rule of survivorship so that you can leave your share to someone else.