Can a Joint Tenancy be Severed by Varying a Will? / IHT Planning

BR5500

I'd greatly appreciate some clarification of this situation regarding varying the father's will to put the house into joint names between the son and mother as I've received some conflicting advice:

1.) Son has lived with the parents for the last 25 years due to ill health.

2.) Father unexpectedly passed last year, I have been advised to vary father's will so father's half share of the house goes straight to the son, the parents were joint tenants but we have been told this can be severed by varying the will (one solicitor has said this is not possible as the parents were joint tenants, meaning that the father's share would automatically go to the mother and therefore the mother could only gift half of the house herself rather than for the share to come direct from the father - if it is not possible to severe the parents' joint tenancy then I do not think it is worth putting the house into joint names of the son and mother as then the Gift with Reservation of Benefit could apply and the mother would have to pay rent and bills would need to paid equally, the 7 yr rule would also apply to this gift). In a nutshell, is it possible to sever a joint tenancy by varying a will? The solicitor Farrer & Co suggests it should be possible - this is from their website: "A Deed of Variation can sever a joint tenancy, so that an interest or part an interest in property that would otherwise pass automatically to any surviving joint owner can be re-directed to someone else."

3.) Assuming the parents' joint tenancy could be severed, and the father's share is left to the son would a declaration of this will change need to be made to HMRC? One solicitor has said there is no need to make a declaration to HMRC as there are no IHT implications (half of the value of the house is approx £200k) whereas another solicitor has said that a declaration would need to be made to HMRC even though this change would not attract any IHT.

4.) Would varying the father's will in this way so that the son inherits half the house from his father ensure that the overall £1m combined allowance remains intact - so that in this case, if the value of half the house is £200k, this would leave a remainder of £800k remaining of the £1m IHT threshold - this is where I wonder if a declaration should be made to HMRC with a valuation of the house to ensure that the remainder of the £1m IHT allowance remains intact? If no declaration to HMRC is made and the son outlives the mother, how will HMRC know how much to deduct from the total RNRB of £1m?

5.) Assuming the parents' joint tenancy can be severed, if the son inherits half the house from the father, would the mum need to pay rent to the son and would the household bills have to be paid equally? We have been told that neither of these points will not apply as long the son inherits half the house direct from the father rather than from a gift from his mother.

6.) If the will is varied and the son becomes joint tenants with the mother, if the mother passes, will the son automatically become the sole owner without going through probate? Also, although this is extremely unlikely, if the value of the house increases dramatically in the next few years, if for the sake of argument, the value of the exceeded £1m would the son still automatically become sole owner, regardless of the house's value (because he is a joint tenant) or would IHT need to be paid - in this case would probate apply because of the value of the inheritance exceeding the threshold - this is extremely unlikely but I'd like to clarify this. We've been told that if the son is a joint tenant with the mother, no probate will be need to be applied for and the son will automatically become the sole owner of the house.

7.) The total value of the estate is worth way below the current £1m threshold but we have been advised to vary will to guard against potential care home costs (not currently an issue and not likely to be) and for the son to avoid having to go through probate, also this gives the son some security of keeping the house if IHT rules are changed in the coming years.

8.) As the son has never bought his own property and the parents' house has always been his sole residence, am I right in thinking that no CGT would apply, even if the son added value to the house and sold it in the future as the sole residence CGT exemption would apply?

Many thanks in advance for clarification of this - the situation is not really as complicated as it might sound but I think the crucial points are being able to sever the parents joint tenancy when varying the father's will to allow the son to inherit his father's half of the house directly and also to be totally sure that the mother won't need to rent to the son or for the household bills to be equally paid. The other key point is whether HMRC need to be notified of the varying the will - especially in relation to ensuring the £1m combined allowance remains intact.

Apologies for the very long post.

Keep_pedalling

What they trying to achieve here? I can’t see how this is going to help cut tax and could actually increase it.

At the moment the widow has total exemptions of £1M, although doing this will reduce her estate by £200k it will also loose the equivalent in transferable NRB. It will also reduce the amount of transferable residential NRB as she will only own a half share of of a £400k house so her exemptions will be reduced to £650k (I am pretty sure the downsizing rule does not apply here)

She may have been advised to do this to protect her son from losing his home should she need to go into residential care but the home would discounted in any financial assessment with a dependant close relative living there.  

This is a pointless exercise as far as cutting tax is concerned, but if her estate is in danger of exceeding £1M then she would be better off gifting him some of her assets rather than vary her husband’s will.

molerat

Surely as joint tenants the property falls outside the scope of the will, it was not his to give away so any clause in the will is invalid and varying the joint tenancy could only be done whilst he was alive.

DRS1

molerat said:

Surely as joint tenants the property falls outside the scope of the will, it was not his to give away so any clause in the will is invalid and varying the joint tenancy could only be done whilst he was alive.

Bit of discussion here (seems it is possible from an IHT point of view).
POST death severance of joint tenancy - Trusts Discussion - The Trusts Discussion Forum

Keep_pedalling

Based on the OPs other thread this is all about protecting the OPs home from care costs and not about cutting IHT. As I stated previously as a dependant relative the house is highly likely to be disregarded in any care financial assessment (it will be 100% disregarded if the OP is 60 or older), and it appears she has another £200k in other assets which would cover any of her care needs for a considerable period. 

https://forums.moneysavingexpert.com/discussion/6563016/cgt-iht-implications-of-mother-transferring-house-into-joint-names-with-son-both-live-at-the-house#latest

As the OP is likely to remain living with her for the long term, if she really does want to make him a joint owner, then the straight forward way to do it would be to simply gift it, rather than go down the complex (and probably expensive route) of varying the will which offers absolutely no advantages over the simple gift.

Jeremy535897

My mother my father's will and severed the joint tenancy of their house, so yes it can be done.

BR5500

Many thanks for the replies, I much appreciate your help.

The only reason for becoming a joint owner with my mother is to give me some form of security - it's unlikely I know but if the IHT rules are changed in the coming years, at least I'd already have inherited half of the property under the current rules. I also understand that if I am a joint tenant with my mother, I would not have to go through probate should I outlive my mother, so this would be another advantage.

That said, it seems as though most people think it would be impossible to sever a joint tenancy by varying a will - if it is not possible to sever the joint tenancy, I feel that it is probably not worth becoming a joint tenant with my mother as the 7 year rule would apply and as the gift is then coming from my mother, would it also follow that she would have to pay rent as the gift of half the house from her would come with reservation of benefit? I've been told that as I already live with my mother, the gift with reservation of benefit rules will not apply but I am not sure if this is correct?

It's very interesting to hear from Jeremy535897 that his parents' joint tenancy was severed, my solicitor doesn't think that this is 100% possible but I've also found a couple of solicitors' websites that suggest it is possible:

Deed of Variation - Share of Joint Property Passing by Survivorship | The Legal Stop

Deeds of Variation: change a Will after death (farrer.co.uk)

The POST death severance of joint tenancy - Trusts Discussion - The Trusts Discussion Forum added by DRS1 is a very interesting discussion on severing a joint tenancy.

It seems to me from the IHTA 1984 s142 that while a joint tenancy cannot be 100% severed as though it were tenants in common originally, it can be severed purely regarding to IHT and CGT. My own solicitor has said that

"It is possible to carry out a deed of variation for me to inherit my father's half of the property, but it would only be effective for tax purposes and that for every other purpose (such as care home fee assessments) it would still be considered as a gift from my mother."  My concern here is that even if the joint tenancy is severed, if it still seen as a gift from my mother, could the Gift with Reservation of Benefit still apply, along with the 7 yr rule? I guess not as the severed joint tenancy through the deed of variation would apply for tax purposes so this would overcome the 7 yr and Reservation of Benefit rule?

I should stress that this is absolutely not to avoid IHT as the estate falls well below the current £1m threshold and is very highly unlikely to exceed £1m by 2030.

I didn't realise before that my mother's transferable residential NRB would be reduced - this is something that hasn't been mentioned to me before. Does this mean that if I outlive my mother, her total RNRB would be £650k rather than £800k? (£1m minus £200k, which is the value of half of the house already inherited). Naturally, reducing the IHT threshold is the last thing I want to do.

Am I right in saying that should it not be possible to sever the joint tenancy, if the gift comes from my mother, she would have to live another 7 years or else it would completely invalidate carrying out the transfer?

Again, I didn't previously realise that "the home would discounted in any financial assessment with a dependant close relative living there." I previously assumed that although I've lived with the parents for 25 years, that this would have no bearing on care home fees as I am not a part owner of the house. I am currently below 50, so  some some way off the 60 age range for being disregarded. Giving me more security is the main aim though, I don't personally think care home fees are likely to become an issue, certainly no relatives have ever been in a care home so while I appreciate that this is an important factor for many, it is not really a reason for me becoming a joint tenant of the property with my mother. In the worst case scenario, my mother's savings would pay the care home fees for a reasonable amount of time.   

I always assumed that if my mother gifted me half of the house (rather than receiving my father's half share through a varied will) it would be much less beneficial and could even mean my mother has to pay rent and that we would have to pay the bills equally? And, as previously mentioned, should my mother not survive another 7 years, it would be a complete waste of time gifting me half of the house from her.

In my previous, much older thread on this subject, 

https://forums.moneysavingexpert.com/discussion/6563016/cgt-iht-implications-of-mother-transferring-house-into-joint-names-with-son-both-live-at-the-house#latest

I came to the conclusion that if my parents' joint tenancy couldn't be severed, it would be best not to proceed with any sort of transfer of half the property.

I must admit I've been going around in circles on this subject for months so I really appreciate advice as I know I need to come to conclusion within a few months before the 2 yr deadline on varying a will expires. My father passed prematurely, totally unexpectedly and totally unnecessarily so I'm also still very distraught about this and considering taking action against the NHS, so with this constantly looming in the background, I'm finding decision making much harder than I used to, to put it mildly! I am very concerned about making a change only for it to make matters worse! So I can't stress enough how much I appreciate unbiased advice on this matter.

Many thanks again for taking the time to consider this and hopefully this post clears up any questions relating to why I'm considering the joint tenancy with my mother.

Jeremy535897

"It is possible to carry out a deed of variation for me to inherit my father's half of the property, but it would only be effective for tax purposes and that for every other purpose (such as care home fee assessments) it would still be considered as a gift from my mother."  My concern here is that even if the joint tenancy is severed, if it still seen as a gift from my mother, could the Gift with Reservation of Benefit still apply, along with the 7 yr rule? I guess not as the severed joint tenancy through the deed of variation would apply for tax purposes so this would overcome the 7 yr and Reservation of Benefit rule?"
Yes. The deed of variation is deemed, for inheritance tax, to be made by the deceased, so cannot result in a gift with reservation.

Jeremy535897

I would also add that if your mother is in good health and there is no prospect of her going into a care home, the council should be fought over the deprivation of assets rules if they try to claim they apply.

"What counts as deprivation of assets?

When your council is deciding whether getting rid of property and money has been a deliberate deprivation of assets, they will consider a few things:

If you knew you would need care and support at the time you gave away your assets.

If paying for care and support was a significant reason for you giving away your assets.

If you knew you would need to contribute money towards your care."
https://www.ageuk.org.uk/information-advice/care/paying-for-care/paying-for-a-care-home/deprivation-of-assets/

BR5500

Many thanks for confirming those points Jeremy, it certainly seems as though I should be able to proceed with a deed of variation which will ensure that I inherit my father's half of the property with no disadvantages such as incurring a gift with reservation. I think I finally understand the 'ins and outs' of varying a will now - although it is not 100% possible to sever a joint tenancy, it is possible to sever it for the purposes of IHT, CGT and any other tax or reservation of benefit etc!

My mother is in good health and there is no prospect of her going into a care home so there is no question of putting half the property in my name to deliberately deprive assets.

If I was to carry out the deed of variation, I've had conflicting advice on whether it has to be declared to HMRC. My solicitor thinks that it is not necessary to report this change to HMRC as the deed of variation does not create a tax liability. (Half of the value of the house is approx £200k so it well below the clutches of IHT). However, if the house isn't valued, would there be an issue in valuing the balance of the RNRB of £1m remaining if I outlive my mother? I'd estimate that half the value of the property is £200k so that would leave a balance of £800k but if the property isn't valued at the point of the deed of variation, how would the remaining RNRB balance be assessed by HMRC in the future?

On the subject of the RNRB, I'm concerned that Keep_pedalling above points out that the RNRB would be reduced to £650k as my mother will then only own half of the £400k house - naturally, lowering the RNRB is not a good idea so this somewhat puts me off going ahead with the deed of variation. 

I must admit I'm currently unsure of whether the deed of variation is actually going to be a good idea or not! I did read somewhere that could be plans afoot to try and apply CGT on the difference between a property's purchase price and its probate value, e.g. if the parents purchased a house for £50k 40 years ago and it is now worth £400k, CGT would be due on £350k! I'd imagine there would be outrage if this was ever implemented. I expect many would simply sell up and buy another property at today's prices so there would be little difference between the purchase price and the probate value a few years down the line. Understandably, my mother would never wish to move at her age but if IHT rules were changed in this way, or any other way in the future, I still think that 'locking in' half the value of the house with today's IHT rules could be advantageous. I appreciate most people think that the £1m threshold will remain until 2030 but given that I live at my mother's house I am in a pretty precarious position in the unlikely event that IHT rules are changed. I guess this is the main reason that my mother and I am considering the deed of variation to provide me with some security.

Incidentally, if Labour did try and bring in the rule of paying CGT on the difference in purchase price and probate value, I wonder if the fact the property has been my sole residence would protect me from paying CGT in this scenario?

Lastly, if I don't arrange the deed of variation and inherit the house in full from my mother if I outlive her, am I right in thinking that the sole residence exemption for CGT would protect me from having to pay CGT on the difference between the probate value and a higher sale price if I decided to sell the house after refurbishing it? I'm pretty sure that if I also owned my own house (which of course I don't) and inherited a house, the probate value would be assessed and if I did it up and sold it for more than the probate value, CGT would apply to the difference?

I recall many years ago a friend encouraging his parents to do up the house in their lifetime for this reason! This might also explain why several houses that have been inherited are sold in a pretty bad state - if they were restored by the person who inherited it, CGT would have to be paid on the 'profit' between the probate value and the increased sale price following restoration (assuming I'm correct in this!)

Many thanks again for all the much appreciated advice.

Bookworm225

BR5500 said:

I recall many years ago a friend encouraging his parents to do up the house in their lifetime for this reason! This might also explain why several houses that have been inherited are sold in a pretty bad state - if they were restored by the person who inherited it, CGT would have to be paid on the 'profit' between the probate value and the increased sale price following restoration (assuming I'm correct in this!)

you will get full relief for CGT for the time period you lived in it as your main / only home (plus final 9 months of ownership if you move out of it before then)

don't live in it and that means you will be liable for CGT on the overall gain x % of your ownership time in which you did NOT live in it as main home (excluding the final 9 months where applicable). It is that simple.

If you own another property you can choose which of the two to class as your main home, but one of them will always incur CGT as it is not your home.

Given your intention is to reside there until its sale you have no CGT worries.