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

Jeremy535897

BR5500 said:

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.

I didn't tell HMRC anything, as the sole asset of any value was the house, and that was only worth about £200,000.

Keep_pedalling

Why go to all the trouble of a deed of variation, when your mother can simply gift you a 50% share of the house? It will provide exactly the same outcome without the complexity of severing the tenancy and having to make a DoV. 

Jeremy535897

Keep_pedalling said:

Why go to all the trouble of a deed of variation, when your mother can simply gift you a 50% share of the house? It will provide exactly the same outcome without the complexity of severing the tenancy and having to make a DoV. 

She has to live seven years, and you avoid any possibility of GWR/POAT issues. That may not be an issue given the values involved, but who knows what the future will bring? I don't think there are any RNRB issues, as any balance not used by father (via the deed of variation) will pass to mother.

BR5500

Keep_pedalling said:

Why go to all the trouble of a deed of variation, when your mother can simply gift you a 50% share of the house? It will provide exactly the same outcome without the complexity of severing the tenancy and having to make a DoV. 

That's exactly what my solicitor suggested initially but having done my own research since then, this could have been disastrous as it could have meant I'd be subject to the Gift with Reservation rule and my mother would have to pay me rent! Also, if my mother was not to survive another 7 years, the gift would arguably be a waste of time, I appreciate that there is a sliding scale of IHT from 3 years and in my case, IHT won't apply anyway but it is potentially a weight off my mind if I inherit half of the house now in case IHT rules are changed in the future.

I'm still a bit concerned about any pitfalls of carrying out the deed of variation but I can't really see any.

My solicitor has confirmed that if my mother carries out a deed of variation to transfer my father’s half share of the house to me, for tax purposes, it is regarded as a gift from my father’s estate.

I am a bit confused by Keep_pedalling's comment of:

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)

My solicitor tells me that the deed of variation won't have any effect on the £1m RNRB and that the value of the half share of the house will be the value at my father's death (which is basically the same value as the current value). So if half of the house is worth £200k, the total RNRB remaining would be £800k - I don't understand how it would only be £650k as my mother would only own half the house following the deed of variation? I always assumed that the £800k balance of the RNRB would remain intact regardless of whether my mother owned all or half of the house?

I can see how it makes more sense not to tell HMRC anything, my solicitor has said the same. 

I found the following on Section 142 on the IHT Act of 1984 which seems relevant:

Inheritance Tax Act 1984 (legislation.gov.uk)

I think as long as the half share of the house is seen as coming from my father rather than my mother, the deed of variation is worth doing, mainly to give me some form of security.

Care home fees aren't really an issue as my mother's health is fine but naturally, if care home fees come up in the future I am aware of the potential deprivation of assets issue.

Jeremy535897

I can't think of any pitfalls other than the costs.