Inheritance tax and tenants in common

jjkaine

My husband and I are joint mortgage holders in our late 40's. Our property is worth in excess of 300,000, should we consider becoming tenants in common? Would this help our daughter in years to come with regard to Inheritance Tax?

Rafter

I don't think it would make any difference.

When one of you passes away the house will automatically pass to the surviving spouse without any Inheritance Tax payable.

Because of the value of the property inheritance tax would be payable on your estate when both of you pass away under current rules.

The rules have changed a lot recently to try and close down various avoidance schemes.

You could take out an insurance policy to cover the tax bill if both of you die suddenly.

You could also investigate various trusts and other options for trying to eliminate all the liability but I think many of these options are now closed off.

Good luck

R.

Jettycat

It can make a difference if you are able to make tax efficient wills.

As joint tennants when one of you dies the full ownership of the house passes to the other automatically. As tennants in common the deceased half share of the house passes under their will.

If your wills leave everything to your spouse on the first death and your daughter on the second death, then there is no difference if you are joint tennants or tennants in common. On the first death there will be no Inheritance Tax (IHT) as transfers to a spouse are free of IHT, but on the second death anything over the nil rate band (currently £263,000) will be taxed at 40%. For example, if your joint estate is worth £400,000 in total then IHT of £54,800 will be payable on the second death.

If you each left your assets to your daughter instead of each other then no IHT would be payable as the estate on each death would be below the nil rate band (£200,000 each time). BUT this does mean that your daughter would own half your house so needs careful consideration and you should consult a solicitor or tax specialist to ensure that the paperwork is drafted correctly and you don't fall foul of any of the anti-avoidance measures.

bert

Jettycat wrote:

On the first death there will be no Inheritance Tax (IHT) as transfers to a spouse are free of IHT, but on the second death anything over the nil rate band (currently £263,000) will be taxed at 40%.

So what if a father and son are joint tenants. One being 24 years old and the other 63. Is there still no IHT? Or is that just if the Joint tenants are spouses.

Jettycat

There is only no IHT if the joint tennants (or tennants in common - it doesn't matter for the IHT calculation) are spouses as transfers between spouses are specifically exempted from IHT (assuming both are UK domiciled).

If a father and son owned a property worth, say £400,000, (and nothing else for simplicity), then on the first death the value of the estate transferred would be £180,000 (this is half the value of the property discounted by 10% for joint ownership - you can't have this discount where the joint owners are husband and wife), which is below the IHT threshold so no tax is payable. However, on the second death the value of the estate would be £400,000 and unless this was going to the spouse of the deceased tax of £54,800 would be payable then.

Hope this makes sense.

bert

Jettycat wrote:

There is only no IHT if the joint tennants (or tennants in common - it doesn't matter for the IHT calculation) are spouses as transfers between spouses are specifically exempted from IHT (assuming both are UK domiciled).

If a father and son owned a property worth, say £400,000, (and nothing else for simplicity), then on the first death the value of the estate transferred would be £180,000 (this is half the value of the property discounted by 10% for joint ownership - you can't have this discount where the joint owners are husband and wife), which is below the IHT threshold so no tax is payable. However, on the second death the value of the estate would be £400,000 and unless this was going to the spouse of the deceased tax of £54,800 would be payable then.

Hope this makes sense.

Thanks for clearing that up, so I only need to worry if half the value of the estate is over £250k?
Also, the father lives overseas (still british national and pays national insurance contributions), the son lives and works in the UK. How does this effect anything?

Why is it called a 'discount' where does this £20k disappear off to?

Sorry if I sound like an idiot.

edit: Oh I get it they bring the threshold down a bit, so if the value of half the property was £260k (house value of £520) then the person inheriting the other half of the property wouldn't pay IHT because 10% off £260k would be £26k putting that 'value' at £234k ?

Jettycat

You only need to worry if the father is subject to UK IHT - probably is as it sounds like the living abroad thing is temporary - and his estate (ie, all he owns is worth more than the nil rate band - currently £263,000).

The "discount" is on the value of the half share of the house. Basically the Inland Revenue are recognising the fact that if you tried to sell half a house it would not be worth half of what you could sell the whole house for, ie, you might be able to sell the house for £400,000 but no-one would pay you £200,000 to own half of it as what they can do with it will be restricted by the other owner - so they might pay £180,000.

If the house is only part of the estate and the whole estate is worth more than the threshold then there may be some IHT to pay but this depends on the terms of the will and who gets the rest of the estate.

IHT can be a very compliciated area especially as it is often difficult to get people to think about, let alone talk about, what will happen to their property when they die. EVERYONE should have a will and should review it at least every five years - don't assume that everything automatically goes to your spouse or children as this often not the case, especially where a house is included in the estate as house prices have increased much faster than the IHT nil rate band over the last few years!

bert

Yes, this is incredibly complicated. I might just forget about trying to understand it.

The father has been a non-UK resident for over 35 years and everything he owns is defenitely over £263K, BUT he has no assets in the UK, everything (cash/property) is in overseas bank accounts or the country he currently lives in. What would be the implications if he moved back to the UK to retire?

It also sounds as if the IHT people force you to sell your property to pay the IHT of if. But surely most people would not want to sell this property they are living in and this would mean they would have to get a mortgage to pay the 40% of the other half of the property?

Jettycat

Hi bert

Sorry for the delay in replying - I've been on hols!

It is possible that he would not currently be subject to UK CGT but you would need to take specialist advice on this! If he returns to the UK then he will be liable.

Yep - IHT is unfair in these situations - however, they will give you ten years to pay the IHT if it is on property - conditions apply and they do charge interest but the rate is low.

Best bet is to get the father to give the son the other half of the property before death and then it will be exempt from IHT if he (the father) lives 7 years after the gift - but there may be Capital Gains Tax on this gift!

You also need to see what the taxes are where the father is living.

Cook_County

Wow doesn't Gordon Brown make things complicated:

1. Where is father domiciled? IHT is payable in the UK whether or not father resides here if he remains domiciled within the UK.
2. Father may indeed have capital gains, gift, estate or wealth taxes where he lives. No advice should be followed without investigating these.
3. If father gives the half of the house he owns to the son and later stays in the house (even for a brief period) he will be benefiting from something he previously owned and so subject to pre-owned asset tax (introduced in the 2004 budget). He may be exempt under a double tax treaty depending where he is resident, but could still be taxable as a non-UK resident. The Inland Revenue have failed so far to keep to their promised timetable of publishing guidance early in 2005; but father should indeed update his Will to take account both of current UK tax rules and rules in the place he is resident.

Robert_Sterling_3

jjkaine wrote:

My husband and I are joint mortgage holders in our late 40's. Our property is worth in excess of 300,000, should we consider becoming tenants in common? Would this help our daughter in years to come with regard to Inheritance Tax?

Yes you should consider TIC and using two nil rate bands.